How to manage stock levels

Every item on the shelf was paid for, or will be. business.gov.au makes the point that cash sitting in unsold stock is cash the business can't use elsewhere. Its cash flow guidance adds that keeping track of what you hold helps you know what is selling, avoid running out and reduce costs from over-ordering.

• Too much stock: cash tied up, shelf and storage space used, and a greater chance that items go out of date, out of fashion or get damaged.
• Too little stock: lost sales, disappointed customers, and rushed orders that may cost more to deliver.

The aim is a level for each item that covers expected sales until the next delivery, with a margin for the unexpected, and no more.

Some items matter far more to sales than others. Sort your item list by sales over the last year, then group the items:

• Top sellers and essential items: check these most often and keep their ranges tight. business.gov.au suggests using stocktake results to identify items that are essential to your business and to order more of your bestsellers.
• Steady middle sellers: check on a regular cycle.
• Slow sellers: hold as little as possible, and consider ordering only when a customer asks. business.gov.au suggests thinking about buying some stock only when a customer places an order.

The minimum is your reorder point, the lowest level you will let an item reach before ordering again, and our guide to managing inventory shows how to work one out from usual sales and delivery time.

The maximum is the most you want to hold at once. Set it from:

• how much the item sells between one delivery and the next
• the smallest order the supplier will accept
• the space you have for it
• its shelf life or season
• how much cash you are prepared to have tied up in it.

When the stock on hand plus anything already on order reaches the minimum, order enough to bring that total back up towards the maximum.

Stock cover is the quantity on hand divided by the usual quantity sold in a week or a month. It tells you how long the current stock would last if sales carry on as normal. Usual sales must be above zero; an item with no recent sales has no cover figure and goes on your list of slow stock to review.

The roller sets need ordering now, and with nothing already on order, the order in the table brings the stock on hand and on order up to the maximum. The garden hoses can wait. The extension leads have far more cover than any other item: perhaps a large order was placed for a promotion that didn't happen, or a delivery was entered twice. Check the stock records before deciding what to do with the extra.

Ranges set from average sales don't suit an item that sells mostly in one season. For seasonal lines, raise the range ahead of the busy period and lower it before the season ends, so you aren't left holding stock nobody wants until next year. business.gov.au's method for reorder points allows for seasonal peaks, how dependable the supplier is and planned sales, and the same factors apply to the maximum.

Building stock ahead of a busy season uses cash before the sales arrive. Put the purchase into your cash flow forecast and check the months in between. business.gov.au's funding guidance points out that it matters whether stock is paid for before it arrives or on delivery.

Item ranges keep each line in check, but the total value of stock is what shows on the balance sheet and what ties up cash. Each month, compare the stock figure in your books with the same month last year and with your sales. Stock growing faster than sales is a sign that ranges have crept up or slow lines are building.

business.gov.au also suggests ways to hold less stock without running out: using an inventory system to automate ordering, which can shorten the time between placing and receiving orders, and negotiating terms with suppliers that suit your business. A shorter delivery time lets you hold a lower minimum.

Ranges go out of date as sales, suppliers and seasons change. After each stocktake, set the counts beside recent sales, as business.gov.au suggests, to see which items sell quickly, which haven't moved and which you can't do without. Use that to adjust each range, and update your records after any change so the next count starts from the right figures.