Retail inventory management: a practical guide for independent stores

On this page

1. 1. Start with a clean item file
2. 2. Receive every delivery the same way
3. 3. Count on a schedule
4. 4. Know how your inventory is valued
5. 5. Set reorder points and order on a rhythm
6. 6. Watch turns and days on hand
7. 7. Clear out dead stock
8. 8. Handle perishables and dates
9. 9. Find and fix shrink
10. 10. Keep prices accurate
11. 11. The numbers to check every week
12. Where Advantage fits

Every product on your shelves is cash you have already spent. Inventory management is the routine that keeps three things true: the right products are on the shelf, you have about the right amount of each, and your records match what is really there. Lose any one of them and you miss sales, tie up cash, or make decisions on numbers that are wrong.

This guide is for an independent owner with one store or a few. It follows the routine in the order it happens: setting up items, receiving, counting, ordering, and finding what goes missing. It ends with the numbers to check every week.

Tax rules for inventory, and food and alcohol rules, differ by state and by business. Where this guide mentions a rule, ask your accountant or the agency named how it applies to you.

1. Start with a clean item file

Your item file, often called the pricebook, lists every item you sell with its barcode, name, department, unit, cost and price. Every inventory number you will ever read starts here. If the file is wrong, the counts, margins and reorder amounts built on it are wrong too.

• One barcode, one item. Duplicates split sales between two records and make both look wrong.
• Units that match how you sell. If you buy cases of 24 and sell single cans, the item is the can. If you also sell the case, the case barcode is its own item. Cartons and packs work the same way.
• Departments you can read. Keep departments few and clear, and put each item where you would look for it in a report.
• Current costs. Update the cost when an invoice changes it, not at the next count.
• Missing items. Check the register’s list of barcodes it could not find, and sales rung on department keys. Each one is usually an item missing from the file.

Our article on keeping your pricebook clean goes through the cleanup step by step.

2. Receive every delivery the same way

Counting problems can begin at the back door, not only on the sales floor. A case that was invoiced but never delivered shows up later as shrink.

1. Count every delivery against the invoice before the driver leaves. Look for damage and short dates.
2. Write shortages and damage on the invoice, and have the driver sign it.
3. Enter the invoice the same day, including purchases from a cash and carry warehouse.
4. Update costs from the invoice, and check retail prices on any item whose cost went up.
5. Track every credit until it appears on a later invoice.

Pay only bills you can match to an order. The FTC warns that scammers send phony invoices made to look like real orders, and advises clear steps for approving purchases and invoices.

If you sell alcohol, federal rules require you to keep records of all alcohol you receive, including the quantity, the supplier and the date. Keeping the invoices meets that requirement.

3. Count on a schedule

A count compares what your records say you have with what is actually there. If you keep a running book inventory, IRS Publication 538 says you must take a physical inventory at reasonable intervals and adjust the book to match.

You do not have to close the store for a day to count. Split the store by risk:

• Small, valuable, easy to resell. Cigarettes, spirits and similar items: count daily or weekly, ideally at shift change so a gap belongs to one shift.
• Fast movers. Count weekly.
• Everything else. Count a few sections each week on a rotation, called cycle counting, so the whole store gets counted over time. Add a full count at least once a year, or as often as your accountant needs.

How to count well

1. Enter every invoice and credit before the count, and pause receiving while you count.
2. Count location by location, shelf by shelf, and count backstock separately.
3. Count blind. People who know the expected number tend to find it.
4. Work in pairs where you can, or have a second person recount a sample.
5. Mark each finished section so nothing gets counted twice.

Our article on inventory counts that match shows how to track down a variance before you adjust anything.

Give each job an owner

Inventory is hard to control when nobody owns it, or when one person does every step alone. Split the work:

• One person orders from each vendor, using the order guide.
• Someone else checks deliveries in, when you have the staff.
• Counts are done or checked by someone who did not receive the stock.
• Every adjustment after a count has a written reason and your approval.

In a small store the same few people do everything, so rotate the jobs where you can, and look at adjustments yourself every week. The goal is not to suspect anyone. It is to make mistakes visible while they are still small.

4. Know how your inventory is valued

You can value stock at what it cost you or at what it sells for, and accountants use several methods to get from one to the other. IRS Publication 538 explains the main ones, including first-in first-out, last-in first-out and the retail method, and an exception for small business taxpayers. The method you use for taxes is a choice to make with your accountant.

For running the store, the retail method is a useful way to estimate inventory and gross profit by department between counts. Our article on the retail inventory method walks through it with a worked example.

5. Set reorder points and order on a rhythm

Ordering by feel tends to cause two problems at once: empty shelves on your best sellers and too much of everything else. A simple formula helps with both.

For each item, set an order-up-to level:

Order-up-to level = average daily sales, times the days between deliveries plus the days from order to delivery, plus safety stock

On order day, subtract what you have on hand and what is already on order, then round to the case pack.

A worked example with made-up numbers

An energy drink sells 12 cans a day on average. The distributor delivers once a week, and you order two days before each delivery. You need to cover 9 days, which is 108 cans. Add two days of safety stock, 24 cans, and the order-up-to level is 132.

On order day you count 40 cans. 132 minus 40 is 92. The drink comes in cases of 24, so you order 4 cases, or 96 cans.

Review the levels when sales change, before holidays and promotions, and whenever a vendor changes its delivery day or minimum order.

Promotions and seasons

A deal or a holiday can lift an item’s sales for a week, then leave you with extra stock for a month. Before a promotion, raise the order-up-to level only for the weeks it runs, and write down the date to lower it again. After the promotion, compare what you sold with what you ordered. That gap is your best guide for the next one. Our retail holiday planning guide covers the busy season in more detail.

6. Watch turns and days on hand

Two numbers tell you whether stock is moving or just sitting.

• Inventory turns = cost of goods sold for the year divided by average inventory at cost.
• Days on hand = 365 divided by turns.

Example with made-up numbers: a department carries $5,000 of stock at cost on average and sells $60,000 at cost over a year. It turns 12 times, so it holds about 30 days of stock.

Compare departments with each other and with last year. A department whose days on hand keep rising is holding cash you could use elsewhere. If you want a national view, the Census Bureau publishes monthly retail sales and inventory estimates by kind of business.

7. Clear out dead stock

Dead stock is product that has stopped selling. It takes up shelf space a better item could use, and it ties up cash.

1. Every month, list the items with no sales in the last 60 or 90 days.
2. Check each one: is it a counting error, a missing barcode, or really not selling?
3. For real dead stock, mark it down, bundle it with a better seller, return it if the vendor’s terms allow, or discontinue it.
4. Remove discontinued items from the order guide so they are not reordered by habit.

Returns are not always possible. For alcohol, federal rules ban sales to retailers on consignment, meaning with the privilege of return, so new items need a careful first order.

8. Handle perishables and dates

Food that spoils needs its own routine.

• Put new stock behind old stock, and check dates in dairy, meat, bread and prepared food every day.
• Except for infant formula, federal rules do not require dates on food. Ask your state whether it has date rules of its own.
• Mark down short-dated items at set times, and record each markdown so it does not look like shrink later.
• Record every item thrown away, by department, with the reason.
• Donate what you can. EPA explains that the federal Good Samaritan Food Donation Act protects certain food donors from liability, including food retailers that donate directly to people in need. Ask your health department how to donate safely.

9. Find and fix shrink

Shrink is the gap between what your records say you should have and what you counted, valued at cost. Theft is one cause, but check the others first.

Work through the usual causes in order:

1. Receiving. An invoice not entered, a short shipment not recorded, a delivery that arrived after the count started.
2. Units. A carton rung as a pack, or a 12-pack counted as one can.
3. Look-alikes. A clerk scanning one flavor for another shows up as a matching short and over.
4. Department-key rings. A sale rung on a department key leaves the item looking short.
5. Unrecorded waste and store use. Damaged, expired or used product that left without a record.
6. Theft. If a gap survives all of that, look for patterns by shift, time and item, and review camera footage.

Keep a simple log of each variance with its cause. A cause that repeats needs a change in how the store works, not another adjustment. Our article on preventing counter theft without accusing staff covers the theft side.

10. Keep prices accurate

Inventory and pricing meet at the register. If an item rings up wrong, the sale, the margin and the stock record are all wrong.

NIST says all states have laws or regulations on price accuracy. Many state inspectors use a NIST procedure, and under it a store fails when more than 2% of the prices checked differ from what the register charges. Make price changes reach the register and the shelf tag on the same day, and scan a sample of 20 to 50 shelf tags every week.

11. The numbers to check every week

Number	How to work it out	What to look for
Sales by department	From the register	Big changes against last week and last year
Gross margin by department	Sales minus cost, divided by sales	A drop after costs went up
Shrink at cost	Expected minus counted, times cost	The same items again and again
Days on hand	Inventory at cost divided by average daily cost of goods sold	A steady climb
Dead stock	Items with no sales in 90 days	A growing list
Out of stock	Best sellers at zero on count day	Any at all
Price errors	Errors divided by tags checked	Anything above zero

Write the numbers in the same sheet every week. The trend tells you more than any single week.

Where Advantage fits

Advantage keeps the item file and the costs behind your inventory decisions in one place. The pricebook holds items with their departments and tax rates, and each item’s price history and cost updates. It also has an items upload, barcode printing and vendor item codes, and your price changes go to the register through Send to POS. Vendor EDI invoices sent to the store’s own invoice e-mail address update item costs, and the purchases screens show vendor orders, cost updates by item and items that stopped selling. See the pricebook, invoices and purchases and our markup and margin calculator.