Inventory how-to

How to calculate how much cash is tied up in inventory

Add up the cost (not retail price) of every unit you currently hold, across all SKUs.

Short answer: Add up the cost (not retail price) of every unit you currently hold, across all SKUs. That total is your cash tied up in inventory. You can also break it down by SKU or category to see where most of your cash is sitting.

The basic calculation

For each SKU: on hand units x unit cost = cash tied up in that SKU. Add this across all SKUs for your total inventory investment. Use your actual landed cost if you track it separately, otherwise use the cost price you pay your supplier.

Break it down to find problem areas

Sort your SKUs by cash tied up, highest first. Look at the top of the list alongside how fast each SKU sells. A SKU with a lot of cash tied up and slow sales is a bigger problem than one with a lot of cash tied up and fast sales, because the first one will sit there longer before it turns back into cash.

Compare against sales to judge if it is too much

A useful check is days of stock: on hand units divided by average daily sales. If a SKU has 200 days of stock and you reorder every 30 days, that is cash sitting idle that could be trimmed. Do this per SKU rather than only at the total inventory level, since averages hide the slow movers.

Do this regularly, not once

Run this calculation monthly or before you place big purchase orders. Inventory levels shift fast in a growing store, and a number from three months ago will not tell you what is tying up cash today.

Step by step

  1. Export current on hand quantities for every SKU.
  2. Multiply each SKU's on hand quantity by its unit cost.
  3. Sum the results across all SKUs for your total cash tied up.
  4. Sort the list by cash tied up, highest first.
  5. For each high-value SKU, divide on hand units by average daily sales to get days of stock.
  6. Flag SKUs with high cash tied up and high days of stock as candidates to stop reordering or discount.
  7. Repeat this monthly so you catch build-ups early.

Worked example

A store has 150 units of a jacket at a unit cost of $40, so that SKU holds $6,000 in cash. It also has 80 units of a phone case at a unit cost of $3, holding $240. The jacket sells 2 units a day, so it has 75 days of stock. The phone case sells 10 units a day, so it has 8 days of stock. Even though the jacket ties up 25 times more cash, it also turns much slower, so it is the bigger candidate for a markdown or a pause on reordering.

How SteadyShelf helps

SteadyShelf does not report cash tied up in inventory or landed cost, so you will need to do this calculation yourself using an export of on hand quantities and unit costs. What it does give you is daily sales per variant and days of stock estimates, which you can use alongside your own cost figures to spot which SKUs are worth trimming.

$29/month flat, unlimited products and suppliers, 30-day free trial. Run the numbers now with the free reorder point calculator.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

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FAQ

Should I use retail price or cost price for this calculation?

Use cost price. Cash tied up in inventory means the money you already spent to buy or make the stock, not what you hope to sell it for. Retail price will overstate the number and make comparisons across SKUs with different margins misleading.

How often should I check this number

Monthly is a reasonable baseline for most small stores. If you carry seasonal stock or place large purchase orders, check it right before you commit to a new order so you are not adding cash into SKUs that already have too much sitting idle.

Let SteadyShelf do this math for every SKU

Order-by dates per supplier, seasonal forecasts and draft POs for your Shopify store. $29/month after a 30-day free trial.

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