Set up products properly
Inventory accuracy starts with clean product data. Give every sellable item a unique SKU, and use variants for size, colour or flavour rather than separate unrelated products, so you can see total sales for a style and stock for each variant. Record the barcode (UPC or your own), supplier, supplier part number, cost, retail price and category.
Decide on categories that match how you buy and how you analyze, not just how the store is laid out. If you buy footwear from four suppliers and want to know which brand turns fastest, brand needs to be a field you can report on. It is much easier to set this up correctly before you have thousands of items.
Receive stock against purchase orders
Create a purchase order for every supplier order, and receive deliveries against it. Count what arrived, compare it with the PO and the supplier invoice, and record shortages, substitutions and damage before putting stock on the shelf. Receiving against a PO updates stock quantities and costs in one step, and it creates a record you can use to dispute short shipments.
If you pay freight, duty or brokerage on imported goods, include those costs in the cost of the inventory (landed cost) rather than expensing them separately. Otherwise your margins look better than they are.
Count regularly with cycle counts
A full physical count once a year is the minimum, and it is required to support your year-end inventory value. But counting everything once a year means errors build for months. Cycle counting spreads the work out: count a small set of items every week so every item is counted several times a year.
Use ABC analysis to decide how often. A items are the 10 to 20% of products that make up most of your sales value; count them monthly. B items get counted quarterly and C items once or twice a year. Count when the store is closed or quiet, and investigate any variance above a set threshold before adjusting the system.
- A items (high value, fast moving): count monthly
- B items: count quarterly
- C items (low value, slow moving): count once or twice a year
- Investigate large variances before adjusting
- Record every adjustment with a reason code
Set reorder points that fit each product
A reorder point tells you when to buy. The simplest formula is average daily sales multiplied by supplier lead time in days, plus safety stock. If you sell four units a day, the supplier takes ten days to deliver, and you keep eight units as safety stock, reorder when stock reaches 48. Safety stock covers variability in demand and delivery; raise it for items you cannot afford to run out of and lower it for slow sellers.
Revisit reorder points seasonally. A point based on January sales will run you out of stock in December. A POS with low-stock alerts tells you when items hit their reorder point; demand forecasting goes further by projecting sales forward. SeroBooks includes demand forecasting with two lead times, so it can plan both the regular supplier and a faster, more expensive backup.
Choose a costing method and stick to it
Your costing method determines the cost of goods sold on each sale and the value of what is left on the shelf. Most small retailers use weighted average cost, where each new purchase updates the average cost of the item. FIFO (first in, first out) assumes the oldest stock sells first and tracks cost by purchase layer. Some businesses use specific identification for serialized, high-value items like jewelry or electronics.
For tax purposes in Canada, inventory is generally valued at the lower of cost and market value, and you need to use the same method consistently year to year. Discuss the choice with your accountant, then configure it once in your accounting system.
Reduce shrink and dead stock
Shrink is the gap between what the system says you have and what is actually there, from theft, damage, receiving errors and administrative mistakes. Reason codes on every adjustment show which cause dominates. Common fixes include tighter receiving, staff permissions so only managers can make adjustments or process refunds without a receipt, and regular counts of high-theft items.
Dead stock ties up cash and shelf space. Run an aging report every quarter showing items that have not sold in 90 or 180 days. Mark them down, bundle them, return them to the supplier if your terms allow, or write them off. Holding them rarely improves the outcome.
Connect the counter to the books
Inventory management breaks down when the point of sale and the accounting system keep separate counts. The POS knows what sold; the accounting system values what is left. If they are not connected, the inventory asset on your balance sheet drifts away from what is on the shelf, and cost of goods sold is a guess until the year-end count corrects it.
The fix is to make every movement of stock a transaction in one place: sales and returns at the counter, receiving against purchase orders, transfers between locations, and adjustments from counts. When those flow into your books automatically, gross margin on the monthly P&L reflects what actually happened.
For retailers with serialized or perishable products, add the extra tracking that applies to you. Serial numbers matter for electronics and phone repair, and lot and expiry tracking matters for pharmacies, grocery and health products. Both help with warranty claims, recalls and write-offs of expired stock, and both are much easier to set up at the start than to retrofit.
Track the numbers that matter
A few metrics tell you whether inventory is healthy. Inventory turnover is cost of goods sold divided by average inventory value; higher means stock is moving. Sell-through rate is units sold divided by units received in a period, useful for seasonal goods. Gross margin return on inventory (GMROI) is gross margin divided by average inventory cost, and tells you how many dollars of margin each dollar of inventory earns.
These only work when your POS and your books agree. SeroPOS tracks real-time stock, low-stock alerts, purchase orders, transfers and adjustments at the counter, and SeroBooks values inventory, handles serial numbers, batch and expiry tracking, warehouse bins and stock valuation in the same ledger, so the inventory number on the balance sheet comes from the same transactions as the shelf count.