Why shops lose money on stock
Stock is cash sitting on shelves. Too much ties up cash and some of it spoils; too little loses sales and sends customers elsewhere. Worst of all, the gap between the books and the shelf grows quietly until it shows up at year end.
The steps
- Standardise the item card: a clear name, a unique code, the unit of measure (piece, carton, kilo) and conversion factors, selling price and category.
- Record opening stock from a physical count, not an estimate, item by item at cost.
- Back every movement with a document: supplier receipt, sales invoice, return, warehouse transfer, count adjustment. No movement without a document.
- Set a reorder point for your core items (method below).
- Choose one valuation method and stick to it.
- Schedule cycle counts by item importance.
- Review a monthly report: slow movers, best sellers and count differences.
Reorder point: formula and example
Reorder point = average daily sales × lead time (days) + safety stock
Safety stock is a buffer for sudden demand or a late supplier. One simple way to estimate it:
Safety stock = (maximum daily sales × longest lead time) − (average daily sales × average lead time)
Example
A grocery shop's cooking oil:
| Item | Value |
|---|---|
| Average daily sales | 20 bottles |
| Maximum daily sales | 28 bottles |
| Average lead time | 5 days |
| Longest lead time | 6 days |
- Safety stock = (28 × 6) − (20 × 5) = 168 − 100 = 68 bottles
- Reorder point = (20 × 5) + 68 = 168 bottles
When stock reaches 168 bottles, place the purchase order. Revisit the figures regularly: seasons such as Ramadan and the Eid holidays change average sales.
Valuing stock: FIFO and weighted average
IAS 2 Inventories requires inventories to be measured at the lower of cost and net realisable value, and allows two cost formulas for interchangeable items: first-in, first-out (FIFO) or weighted average cost. Items that are not interchangeable are valued at their specific cost.
Side-by-side example
You buy 100 units at 10, then 100 units at 12, and sell 150 units.
| FIFO | Weighted average | |
|---|---|---|
| How | First 100 at 10, then 50 at 12 | Average = (1,000 + 1,200) ÷ 200 = 11 |
| Cost of goods sold | 1,000 + 600 = 1,600 | 150 × 11 = 1,650 |
| Closing stock (50 units) | 50 × 12 = 600 | 50 × 11 = 550 |
When prices rise, FIFO gives a lower cost of sales and higher closing stock, while weighted average smooths swings. Software that records each movement as it happens recalculates the average on every new receipt (a moving average). Pick one method, apply it consistently, and ask your accountant what suits your business and your country's requirements.
Counting: full and cycle counts
- Full count: count every item at least once a year, usually at closing, with movements paused.
- Cycle counts: count part of the stock on a regular schedule without stopping work. Group items by value:
| Class | Roughly | Suggested count frequency |
|---|---|---|
| A | A few items making up most of the stock value | Monthly |
| B | Mid-value items | Quarterly |
| C | Many low-value items | Twice a year |
For each count, print the count sheet without the book quantity so counters aren't influenced, compare afterwards, and investigate every large difference before posting the adjustment.
Barcodes and warehouses
- Barcodes cut selling errors (one item at another's price) and speed up counts. Print in-house labels for items without a manufacturer barcode.
- More than one warehouse or branch: give each location its own balance, and move goods with a transfer document that takes them out of one and into the other. Hand-carried transfers with no document are a top cause of differences.
- Batches and expiry dates for food, medicines and cosmetics, and serial numbers for devices and warranties.
Top causes of shortages and how to prevent them
| Cause | Prevention |
|---|---|
| Receiving errors (fewer units than invoiced) | Count on receipt and match to the purchase order |
| Damage and expiry | Track batches and put the oldest at the front |
| Internal or external theft | Separate receiving, selling and counting duties; surprise counts on valuable items |
| Selling one item under another's code | Sell by barcode |
| Branch transfers without a document | Allow no movement without a document |
| Unit-of-measure errors (carton vs piece) | Set conversion factors on the item card |
Numbers to watch every month
| Measure | Formula | What it tells you |
|---|---|---|
| Stock turnover | Cost of goods sold ÷ average stock value | How many times you "sell through" your stock in the period |
| Days of stock | 365 ÷ annual turnover | How many days current stock will last |
| Count difference rate | Value of differences ÷ stock value | How accurate your records are |
Example: yearly cost of goods sold 600,000 and average stock 100,000 → turnover = 6 times, days of stock = 365 ÷ 6 ≈ 61 days. If your supplier delivers within a week, you probably carry more than you need and could free up cash.
Watch slow movers too, items not sold for 90 days or more: discount them, bundle them or stop reordering before they spoil or lose value.
Summary
Record every movement with a document, cycle-count by item importance, calculate reorder points and safety stock for core items, and stick to one of the two cost formulas IAS 2 allows. Barcode selling and counting plus documented warehouse transfers prevent most shortages. For how stock ties into VAT, see Egypt VAT or how to calculate VAT in Saudi Arabia.