How much stock should I buy?

How much stock should I buy?

As a retail business, your stock is your most valuable asset. Almost certainly, it’s also your biggest expense, and if you look back at where most of your money has gone, your stock will make up the bulk of your expenditure. So it is crucial to consider exactly how much stock you need to buy.

Too much stock means too much cash tied up in your business. As a business, reducing how much stock you are carrying at any one time is crucial to keeping your cash flow healthy.

Imagine that your stock is not product, but a pile of cash. Avoid having too much “cash” sitting around not working in your business. To do this, you’ll need to be actively managing your stock.

There are three golden rules of stock management that will improve your cash flow.

  1. Order the right amount
  2. Trial and repeat
  3. Clear as you go

In this post I’ll be starting with the first point and covering the basic question at the heart of stock management – how much stock should I buy?

Strike a balance

The biggest challenge in retail is working out how much stock to have in your business so that you don’t miss out on sales, while at the same time keeping your stock under control.

It is not an easy balance to strike, and even big retailers that have access to forecasting systems and trained analysts have to manage this really carefully, so don’t feel bad if it doesn’t come easily to you.

How do you work out how much to buy?

One of the most common questions I get asked is how to work out how many of each product to buy.

You’ve identified what products you want to have and you’re excited to bring them into the business. Now you are at the point where you have to decide how much to order.

Set a budget

Before you decide on individual quantities for each item, first get clear about how much money you have available to spend on new stock.  

In retail businesses, this amount is known as “open to buy” or OTB. Big businesses calculate their OTB by looking at forecast sales and how much stock the business is prepared to carry, but you may make your decision based on the cash you have available to you at the time.

Set yourself a budget – either for each month or for a whole season. Each product that you buy will come out of this budget, so you’ll need to get clear on your number, and keep it close at hand when you are ordering products to avoid going over.

Working out how much stock to buy

There are three main factors that affect the quantity of stock you should buy.

One – how many will you sell on average per week?

If you are re-ordering a product that you already sell, you will be able to just look at past sales history for this information.  Ideally, look at a minimum of 4 weeks of sales to get an average weekly sales number.

If you have not sold this item before – what do you typically sell on similar items?  For example, you are bringing in a new lampshade. How many per lampshade do you typically sell of your existing stock?

The big mistake that people make at this stage is assuming that every item is going to become a bestseller.  

If you have 15 lampshades in stock, and 14 of them sell at a rate of 1 a week, and one sells 5 a week, don’t assume immediately that your new lampshade will match the rate of the best seller.

Two – how long do you want to have the product in stock for?

Once you have worked out how many you think you are going to sell per week, multiply that by the number of weeks you want to stock the product for.

If you change your stock twice a year, you won’t want the stock for more than 26 weeks.  

And if you are buying seasonal products, for example, Christmas ornaments, make sure you only buy enough stock to cover you for the weeks running up to that season.

As an example, imagine you are buying a new scented candle.  Your current scented candles sell at around 3 per week.

You want to change your candle display 4 times a year, so you decide to only buy enough for 13 weeks.

Ideally, then you would buy 39 candles (13 weeks x an average of 3 per week).

Three – how quickly can you get more if you sell out?

Let’s say you work out you need 39 candles.  

However, the candle supplier is very flexible and can get you more stock within 2 weeks.  

Now you don’t have to buy all 39 candles upfront.  In fact, you could buy just enough to cover you for 2 weeks or 6 candles rather than committing to all 39.

But, if the candle supplier was importing their stock and took 12 weeks to get you more, then you would need to buy enough stock to cover you for that whole 12 weeks.

But what if buying more stock gets me a better price?

It is very tempting to buy larger quantities of product to take advantage of better prices.

However, I would not advise you to buy more than you honestly think you can sell.  Yes, each item will be more profitable, but if you get stuck with more stock than you can actually get through, it will quickly clog up your cash flow and cause major issues.

If you really can’t make it work with smaller quantities, ask your suppliers if you can give them a commitment to buy that quantity, perhaps over a longer period of time, for example, a year.

Not everyone will agree to this, but it’s worth asking. Spreading out your payments over a longer time period is always beneficial.

Refer back to your budget

If you are purchasing several items at once, you may find that you run through these numbers and then find that you are way over your budget.

Again, you do have to be strict with yourself at this point and look at where you can cut back on quantities, or even drop a couple of lines in order to come into budget.

Want to free up more money to buy all that great stock you are thinking about?  Then that’s about clearing out stock that isn’t working for you – a topic for another blog!