Module 1: Inventory Basics

Why Inventory Control Matters to Profit

For many businesses, stock is the largest asset after cash, and sometimes larger. A hardware shop, a pharmacy, a supermarket or a spare parts dealer may have most of its money sitting on shelves. Every unit on the shelf is cash that has been spent and not yet recovered. If stock is lost, stolen, damaged, expired or simply never sells, that money is gone. If the right stock is missing when a customer asks for it, the sale is lost and the customer may not return. Inventory control is the set of habits and tools that keeps the right goods, in the right quantity, in the right place, with accurate records.

How inventory affects profit

Inventory touches profit in several direct ways:

• Cost of goods sold. Gross profit is sales minus the cost of the goods sold. If stock disappears without being sold, the cost still has to be absorbed, and gross profit falls.
• Lost sales from stock-outs. When a fast-selling item runs out, you lose not only that sale but often the customer's whole basket.
• Holding costs. Keeping stock costs money: rent for space, security, insurance, handling, damage, obsolescence and the cost of the cash tied up. These costs are easy to overlook because they are spread across many expense lines.
• Write-offs. Expired medicines, spoiled food, damaged goods and outdated models must be written off, reducing profit.
• Cash flow. Money locked in slow-moving stock cannot be used to pay suppliers, staff or rent, even if the business is profitable on paper.

The two opposite dangers: too much and too little

Inventory control is a balancing act. Too little stock leads to stock-outs, emergency purchases at higher prices and unhappy customers. Too much stock ties up cash, fills storage space and increases the risk of expiry and theft. The aim is not "as little stock as possible" but "enough of the right stock". The rest of this course gives you tools for finding that balance: ABC analysis to focus on what matters, reorder points and safety stock to time orders, economic order quantity to size them, and stock counts to keep records honest.

Worked example: the hidden cost of poor control

Consider a hypothetical agrovet shop in Nyeri with annual sales of KES 6,000,000 and a gross margin of 25 percent, so gross profit is KES 1,500,000 before losses. At the year-end count, the owner discovers that stock worth KES 180,000 at cost is missing or damaged, and another KES 120,000 of veterinary products has expired. Together that is KES 300,000 of losses, which reduces gross profit to KES 1,200,000, a drop of 20 percent. To earn back KES 300,000 of profit at a 25 percent margin, the shop would need extra sales of KES 1,200,000. In other words, every shilling of stock lost requires four shillings of new sales to replace the profit.

The owner also notices that two popular dewormers were out of stock for several weeks during the rainy season, when farmers need them most. Those lost sales do not appear anywhere in the accounts, but they are real.

After introducing simple controls, such as bin cards, a monthly count of high-value items, first-expiry-first-out shelving and reorder points for top sellers, the owner can see problems monthly instead of yearly and act before losses grow.

Key measures to start tracking

• Stock value: the cost of all stock on hand at a date.
• Stock turnover: cost of goods sold for a period divided by average stock value. A higher figure usually means stock moves faster. Compare it over time and with similar businesses rather than against a universal target.
• Days of stock: how many days the current stock would last at the current rate of sales.
• Stock-out incidents: how often items customers want are unavailable.
• Shrinkage: the value of stock lost through theft, damage, errors or expiry, often shown as a percentage of sales.

Common mistakes to avoid

• Counting stock only once a year, so problems are discovered too late to fix.
• Assuming that more stock is always safer.
• Ignoring holding costs because they do not appear as one clear expense.
• Treating every item the same, rather than focusing on high-value and fast-moving lines.
• Letting the person who handles stock also keep the only records, with no independent check.