Quick answer
Carry enough stock to cover sales during your supplier's lead time plus a safety buffer, and little more. Stock on a shelf is cash you can't use for wages, rent or tax. Measure days of stock and stock turnover by product, cut or clear slow lines, reorder best-sellers more often in smaller quantities, and negotiate supplier terms that line up with how quickly each line sells.
Key points
- Every dollar of stock is a dollar of cash you've already spent.
- Days of stock = stock value ÷ cost of goods sold per day. Track it by product line.
- Slow lines drain cash quietly; best-sellers deserve more frequent, smaller orders.
- Supplier terms that match your sell-through turn stock from a cash drain into a cash-neutral cycle.
Walk through any shop, warehouse or workshop and you’re looking at money. Not metaphorically — every box on the shelf was paid for with cash that could have covered wages, rent or the BAS. Inventory is the most visible way a business ties up cash, and one of the easiest to improve once you measure it.
Why does stock hurt cash flow so much?
Because you usually pay for it before you sell it. If a supplier wants payment in 14 days and the product takes 60 days to sell, you’re funding 46 days of that stock yourself. Multiply that across hundreds of lines and it adds up to a serious sum.
Stock also hides problems. A business can look profitable on paper while its cash is sitting in slow-moving lines that may eventually need to be discounted or written off.
Stock also affects how a business looks to buyers and lenders. A shelf full of slow lines inflates the balance sheet but not the bank balance, and anyone reviewing the business will ask how much of that stock would really sell at full price.
How do you measure whether you carry too much?
Two measures do most of the work.
Stock turnover = cost of goods sold ÷ average stock at cost (over the same period).
Days of stock = average stock at cost ÷ (cost of goods sold ÷ 365).
| Measure | Illustrative figures | Result |
|---|---|---|
| Annual cost of goods sold | $730,000 | — |
| Average stock at cost | $120,000 | — |
| Stock turnover | $730,000 ÷ $120,000 | about 6.1 times a year |
| Days of stock | $120,000 ÷ ($730,000 ÷ 365) | about 60 days |
The figures are illustrative. The real insight comes from running the same numbers by product line. Most businesses find a small group of lines turning quickly and a long tail barely moving at all.
How much stock is the right amount?
For each line, you need enough to cover:
- Lead time demand — how much you sell while waiting for the next delivery;
- A safety buffer — for late deliveries or a busy week;
- Minimum order quantities — if the supplier insists.
Anything beyond that is cash you’ve chosen to park. For best-sellers, running out costs sales, so keep the buffer healthy. For slow lines, it’s often better to order to demand or stop stocking altogether.
How can you free up cash tied up in stock?
- Clear the dead lines. A sale, a bundle or a return to supplier turns dead stock back into cash — even at a lower margin.
- Order more often, in smaller amounts, for your best-sellers.
- Negotiate terms that match sell-through. If a line takes 45 days to sell, 45-day terms make it close to cash neutral.
- Use consignment or drop-ship for high-value, slow-selling items where suppliers offer it.
- Review before reordering. A simple rule — nothing is reordered without checking its days of stock — prevents slow lines from quietly refilling.
Watch your margin while you do this. Clearing stock at a discount is often right, but understand the cost: our piece on the true cost of discounts shows how quickly they eat profit.
If a supplier is offering a genuine bulk discount or you need to stock up for a peak, find out whether funding could cover it — no credit check to ask.
Does stock matter at tax time?
Yes. At the end of the financial year you generally need to account for the change in your trading stock value. The ATO says small businesses using the simplified trading stock rules may not need a formal stocktake if the value changed by $5,000 or less. Your accountant will guide you on valuation. Our EOFY checklist includes stock in the June to-do list.
How do you negotiate better stock terms?
Suppliers are often more flexible than owners assume, especially with reliable customers. Try:
- Longer payment terms — moving from 14 to 30 days on fast-selling lines can make them close to cash-neutral.
- Smaller minimum order quantities in exchange for more frequent orders.
- Sale-or-return arrangements for new or seasonal lines.
- Staged deliveries on large orders, so you pay as stock arrives rather than all at once.
- Early-payment discounts — worth taking only if the discount beats the cost of the cash, and only if your 13-week forecast shows you can spare it.
Go into the conversation with your numbers: how much you buy a year, how reliably you pay, and what you’re asking for. A supplier who understands that better terms mean bigger, steadier orders will often meet you halfway.
When stock is an opportunity, not a drain
Some stock decisions genuinely create value: a supplier clearing a range at a sharp discount, a peak season you know will sell through, or a new product line with proven demand. The problem is usually timing — the cash leaves now, the sales arrive later.
That’s a gap we can help bridge. We consider trading businesses for unsecured and cash-flow facilities typically from $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000. It’s a quick enquiry with no credit check, your details aren’t passed around, and a real person talks it through with you. Tell us honestly what you want to buy and how quickly it sells — the clearer the picture, the better the match.
Frequently asked questions
How do I calculate stock turnover?
Divide your cost of goods sold for a period by your average stock value at cost for the same period. A result of 6 over a year means you sell through your average stock about six times a year, or roughly every two months.
What is a good stock turnover ratio?
It depends heavily on the industry. Fresh food turns over quickly; hardware, furniture or spare parts much more slowly. Compare with your own history and with similar businesses rather than a single benchmark.
Do I need to do a stocktake at the end of the financial year?
Generally you need to account for changes in trading stock. The ATO says that under the simplified trading stock rules for small businesses, if the value of your trading stock has changed by $5,000 or less you may not have to do a formal stocktake. Check the rules with your accountant.
Is it worth borrowing to buy stock?
It can be, when the stock sells reliably and the margin comfortably covers the cost of finance — for example, a bulk discount or stocking up ahead of a known peak season. Borrowing to hold slow-moving stock rarely makes sense.