Stock is the part of a business where two fears meet. The fear of running out, losing a sale and disappointing a customer, pushes you to hold more. The fear of tying up money, watching it gather dust and expire, pushes you to hold less. Most businesses settle the tension by feel, and the result is usually the worst of both: too much of the slow-moving lines, and too little of the ones that actually sell.
What I want to do here is replace the feel with a few simple numbers, so you can hold less stock in total and run out less often, at the same time.
Stock is cash in another form
Let's start with the idea that makes the rest make sense. Every item on your shelf is money that has left your bank account and hasn't come back yet. It comes back only when the item sells and the customer pays.
So stock is a store of cash, and the question about any stock is: how long will this money be away? That's measured in stock days: the value of your stock, divided by what your goods cost you over a year, times 365.
If you hold LKR 2.4 million of stock and your cost of goods sold is LKR 14.4 million a year, you hold about 61 days of stock. On average, each rupee you spend on stock is away for two months before it comes back.
If you could run the same business on 45 days of stock, you'd hold about LKR 1.78 million instead, and roughly LKR 620,000 would come back into the bank, permanently, for as long as you kept stock at that level.
Does that make sense? Think of a water tank on a roof. Water comes in from the main and goes out through the taps, and the tank exists to cover the gap between the two. Too small, and the taps run dry when everyone showers at once. Too big, and you've paid for a tank full of water that sits there going stale. Stock is the business's tank, sitting between the rhythm of buying and the rhythm of selling.
Not all stock is equal
The first step to holding less is noticing that a small number of your lines usually account for most of the value. Sort your stock lines by how much you spend on each over a year, and you'll typically find something like this:
A handful of lines, maybe a fifth of them, account for most of your spending. These are your A items.
A middle group accounts for a moderate share. These are B items.
A long tail of lines accounts for very little. These are C items.
The exact proportions vary, and the pattern shows up in many businesses that carry lots of lines. And it tells you where to put your attention. A items need close management: frequent, careful reordering, tight counts, good supplier relationships. C items can be managed loosely: order in larger batches, check occasionally. Spending the same effort on every line wastes it on the ones that don't matter.
When to reorder
The question "when should I reorder?" has a clear answer, and it depends on three numbers you can find for each important line.
How fast it sells: average units per day.
How long it takes to arrive: the lead time, from placing the order to having stock on the shelf.
How much buffer you want: safety stock, to cover days when sales are higher than usual or the supplier is late.
The reorder point is:
daily sales × lead time + safety stock
If a line sells about 20 units a day, takes 7 days to arrive, and you want a buffer of 40 units, your reorder point is 20 × 7 + 40 = 180 units. When stock falls to 180, you order. By the time the new stock arrives, you'll be down to about your safety stock, and never at zero.
Set a reorder point for each A item, and write it on the shelf or in the stock system. That turns reordering from a judgment call into a routine anyone can follow.
Setting the safety stock
Safety stock is where the two fears are balanced, so it's worth setting deliberately.
Hold more safety stock when a line's sales jump around a lot, when the supplier is unreliable or far away (imports, for example, where lead times can stretch), and when running out is costly, because the customer will go elsewhere or the line is part of a bigger order.
Hold less when sales are steady, the supplier is close and reliable, and a short stock-out is a minor inconvenience.
Review safety stock every few months. Suppliers change, demand shifts, and a buffer set two years ago may be far too large or too small today.
There's a chain behind a lot of overstocking. Too much stock is usually the result of orders that were too large. Large orders are often the result of a supplier discount that looked too good to refuse. And the discount looked good because only the unit price was being compared, without the cost of the cash, space and waste that came with it. Once you see the whole chain, a discount becomes a different decision.
Dealing with slow and dead stock
Every business accumulates stock that barely moves: the colour nobody wanted, the size that didn't sell, the product a customer asked for once. It sits on the shelf, takes up space, and holds cash hostage.
List any line that hasn't sold in the last three to six months. For each one, decide: discount it to clear, bundle it with something that sells, return it to the supplier if they'll take it, or write it off. It's a difficult decision, because writing off stock feels like admitting a loss. But the loss already happened when the stock stopped selling. Clearing it turns a dead asset back into some cash and space.
Then look at why it happened, so you order differently next time. Buying in large quantities to get a better unit price is a common cause: the discount looks good on the invoice and turns into slow stock on the shelf.
Count, and compare
Finally, check that the stock you think you have is the stock you actually have. Count regularly, all lines a few times a year, and your A items more often. Compare the count with what your records say you should have. A difference tells you something: recording errors, damage, waste, or theft. (Our guide to internal controls covers this side in more detail.)
The bigger point
A buying decision touches far more than the stock room. A large order at a discount improves the margin on paper, ties up cash for months, takes up space and raises the risk of waste. Holding too little loses sales and customers' trust. So stock decisions are best made with the whole business in view: the margin, the cash, the customer and the shelf, together. Owners often start by buying by feel, swing to cutting stock hard after a cash squeeze, and settle, with a few numbers, into holding the right amount of the right things.
How Gridwerk helps
Setting stock levels, reorder points and safety stock, and building the counting and review routine, is part of our Process Optimization work, and the stock policy and count controls that keep it in place sit in Process & Financial Control. If you suspect too much of your cash is sitting on shelves, start with the free diagnostic. It's eighteen questions, about seven minutes, and then we call you to go through the rest.
Gridwerk diagnostic