A store should carry enough inventory to cover sales until the next delivery plus a safety cushion, and no more, because excess stock ties up cash. Ambercroft Business Capital, a small-business funding broker in Lafayette, Indiana, shows Tippecanoe County retailers how to work out turnover, days on hand and carrying cost by hand before financing any stock.
Shops in Tippecanoe County, Indiana by the count
Retail trade had 529 employer establishments in Tippecanoe County in 2023, more than any other sector; 35.0 percent had fewer than five employees (U.S. Census Bureau, County Business Patterns 2023). Another 797 retail businesses had no employees in 2024 (U.S. Census Bureau, Nonemployer Statistics 2024). For a small shop, inventory is usually the largest use of cash after rent and wages, which is why getting the amount right matters before any financing conversation.
Step 1: turnover
Turnover counts how often, in a year, the shelves empty and refill at cost. Divide the cost of goods sold for a year by the average inventory value at cost.
A hypothetical shop, purely for the arithmetic: cost of goods sold of $300,000 and an average inventory of $75,000 gives a turnover of 4. Divide 365 by 4 and the stock sits on the shelf about 91 days on average. Neither number is good or bad on its own; compare them with your own history and by product line, because a fast-moving line can hide a slow one.
Step 2: how much you actually need
- Work out average daily sales at cost for each main product line.
- Multiply by the number of days between placing an order and receiving it.
- Add a safety cushion for late deliveries or a busy week, based on your own records, not a rule of thumb.
- The total is a reorder point: when stock falls to it, order again.
Stock above the reorder point plus one order's worth is extra. It may be worth holding for a supplier discount or a product launch, but it should be a decision, not an accident.
A worked reorder point
Again with hypothetical figures: a gift shop sells about $400 a day at cost in one product line, its supplier takes 10 days to deliver, and its own records show deliveries running up to 5 days late. Ten days of sales is $4,000; five days of cushion is $2,000; the reorder point is $6,000 of stock at cost. When that line falls to $6,000, the next order goes out. Anything well above $6,000 plus one order is stock the shop is choosing to hold.
Step 3: what extra stock costs
Carrying cost is everything you pay to hold inventory: the cost of the money tied up in it, storage and space, insurance, shrinkage, and the risk that items go out of fashion or expire. Add up what those cost you over a year and divide by the average inventory value to get a carrying-cost percentage for your shop. Then compare that with the margin a large order earns. If financing is involved, its total cost belongs in that comparison too.
No calculator on this site works out turnover or carrying cost; the arithmetic above is meant to be done by hand or in a spreadsheet.
Step 4: funding the stock you need
Once the amount is clear, the structure follows. A large order of specific goods fits inventory financing, where the stock secures the funding. Regular restocking usually fits a business line of credit, drawn and repaid as goods sell. A one-off gap, such as stocking a new location, may suit working capital.
Shelving, coolers or a forklift are equipment, not inventory, and are financed separately; the equipment payment calculator shows how an equipment payment and total cost are built, whatever the machine.
What a partner will ask
- Sales by product line for the past year
- A recent inventory count or valuation
- Supplier quotes for the order
- Recent bank statements
- Any UCC filing already covering your stock
The turnover figures from step 1 answer the partner's main question: how quickly will this stock become cash? Sector notes for shops and other businesses are under funding by sector, and more posts are on the Ambercroft blog.
By Ambercroft Business Capital · Updated