For most shops and trading businesses, inventory is the biggest use of cash. Too much stock ties up money and goes stale; too little means lost sales and customers who try the shop next door. Good inventory management isn't about fancy software. It's a few simple habits, done consistently. This guide covers them, with formulas and examples for Indian businesses.
Start with a clean item master
Every inventory system, from a notebook to software, depends on the item list. For each item, record:
- A clear name and a unique code (SKU), plus the barcode if it has one
- HSN code and GST rate, so every bill is right. Use our HSN code finder
- Unit of measure and any conversion (for example 1 box = 12 pieces)
- Purchase price, selling price and MRP
- Reorder level and preferred supplier
Then count everything once and enter it as opening stock. A wrong opening count makes every later report wrong.
Know which items matter most (ABC analysis)
Typically, a small share of items brings in most of your sales value. Sort items by annual sales value and group them:
| Group | Typical share | How to manage |
|---|---|---|
| A | Top items making up about 70–80% of sales value | Count often, never run out, negotiate with suppliers |
| B | The next 15–25% | Regular reorder levels, monthly review |
| C | The long tail, the last 5–10% | Order in bulk or on demand, watch for dead stock |
The percentages are a rule of thumb, not a law. The point is to spend your attention where the money is.
Set reorder levels with a simple formula
Reorder level = average daily sales × supplier lead time (days) + safety stock
Example: you sell 15 packets of an item a day, the distributor takes 3 days to deliver, and you keep 2 days' sales as a buffer. Reorder level = 15 × 3 + (15 × 2) = 75 packets. When stock falls to 75, reorder.
Review reorder levels every season. Festival months, school reopening and weddings change demand a lot.
Sell older stock first (FIFO and FEFO)
Arrange shelves so the oldest stock sells first (first in, first out). For anything with an expiry date, such as food, medicines and cosmetics, use first expiry, first out: sell the batch that expires soonest. Check expiry dates every month and return or discount short-dated stock early.
Count regularly, not just at year-end
- Cycle counts: count a few A items every week and the rest on a rotating schedule, rather than closing the shop for a full count.
- Investigate differences straight away: billing mistakes, wrong units, unrecorded returns, damage or theft.
- Record adjustments with a reason, so you can see patterns.
Stock management tips for a small shop: daily habits
Formulas only work if the stock figure in front of you is true. These habits keep it true. They cost almost nothing and suit a kirana, hardware, garment or mobile shop with a few staff.
- Enter purchases the day goods arrive, before they go on the shelf. Check the supplier's bill against what was actually unloaded, note any shortage or breakage on the bill, and enter the received quantity, not the billed quantity. Stock that sells before it is entered is where negative stock comes from.
- Give one person the right to adjust stock. Everyone can bill; only the owner or one trusted person changes stock figures, and always with a reason (damage, expiry, count difference). Read the week's adjustments every Saturday. A pattern of small corrections on the same items usually points to a billing habit or a leak.
- Keep a separate damage and expiry bin. Broken, torn or short-dated goods come off the shelf the same day and go into one marked box, recorded out of saleable stock. They are then returned, sold at a marked-down price or written off with a note, not left to be counted as good stock at the next count.
- Fix a return-to-supplier day. Pick one day a week or fortnight to send back wrong, damaged or slow items, with a debit note for each. Returns that sit in a corner for months are cash you have already paid and may no longer be able to claim back.
- Scan or pick every item at billing; no “misc item”. A bill line typed as “general item ₹350” sells nothing from your stock list. If a barcode won't scan, fix or reprint the label then and there with a barcode generator, or pick the item by name.
- Move goods only against a document. Nothing leaves the back store or goes to another branch without a bill or a delivery challan. Stock sent on approval or to a job worker still belongs to you; the challan is how you remember it.
- Prepare for festivals six weeks ahead. Before Diwali, Pongal, Onam, Eid, school reopening or the wedding season, pull last year's sales for the same weeks, raise reorder levels on your A items and book quantities with suppliers early. After the season, return or clear what is left within a month, before it turns into dead stock.
- Close the day with a five-item check. At closing, count five fast sellers and compare them with the stock figure. It takes two minutes, and differences caught the same day are easy to explain; differences found at year-end rarely are.
Doing these with a notebook or Excel? Our stock register format has columns for receipts, sales, returns and write-offs that match these habits.
What GST law expects from your stock records
Under Rule 56 of the CGST Rules, every registered person except composition taxpayers must keep a stock account for each commodity, showing opening balance, receipts, supplies, goods lost, stolen, destroyed, written off or given as gifts or free samples, and the closing balance. Input tax credit isn't available on goods lost, stolen, destroyed, written off or given away as gifts or free samples, so record such write-offs properly and talk to your accountant about the credit. Read CGST Rule 56.
Four numbers to watch every month
| Measure | Formula | What it tells you |
|---|---|---|
| Stock turnover | Cost of goods sold ÷ average stock value | How many times your stock sells through in a period. Higher is usually better |
| Days of stock | 365 ÷ annual stock turnover | How many days your current stock would last |
| Dead stock | Items with no sales in 90 days (or your own limit) | Cash stuck on shelves. Discount, bundle or return it |
| Stock-outs | Times a fast-moving item hit zero | Lost sales. Raise the reorder level or safety stock |
Excel or inventory software: when to switch
| Notebook / Excel | Inventory software | |
|---|---|---|
| Stock updates | Manual, after billing | Automatic with each sale and purchase |
| Barcodes | Not practical | Scan to bill and to receive stock |
| Reorder alerts | You have to check | Low-stock lists from your reorder levels |
| GST link | Separate from billing | Item HSN and rate flow into invoices and returns |
| Works for | Under ~100 items and few bills a day | Growing item lists, several staff, online orders |
A good signal to switch: you have more than a few hundred items, more than one person billing, or you find yourself fixing stock in Excel every week.
Not ready to switch? Start with our free stock register format in Excel: it works out closing stock, stock value and reorder alerts from your purchase and sale entries, with columns that follow GST Rule 56.
A 7-day plan to get your inventory under control
- Day 1: list all items with SKU, unit, HSN and GST rate.
- Day 2: count stock and record opening balances.
- Day 3: tag A, B and C items.
- Day 4: set reorder levels for A and B items.
- Day 5: rearrange shelves for FIFO/FEFO and check expiries.
- Day 6: start recording every purchase, sale and return the same day.
- Day 7: review stock-outs and dead stock, and set a weekly cycle-count routine.
Where VelBooks fits
VelBooks inventory management updates stock as you bill and supports barcode billing, with GST billing, purchases, accounts and an online store in the same browser-based app. If you're outgrowing Excel, try it free for 30 days with your own items.
Sources
This article is general information, not legal or tax advice. Rules change; check the official sources above or consult your tax adviser.