Every dollar sitting in ingredients, packaging or finished product is a dollar you cannot use for anything else until you make it, sell it and get paid. The more days of stock you hold, the more cash is tied up. To see how much, count your inventory, value it at what you paid and divide by what you use each day. Often the money is sitting in what you bought in quantity (jars, labels, boxes) more than in fresh ingredients.
Why stock is cash standing still
Follow one dollar: you pay it at the wholesaler, it sits in your store cupboard, goes into a batch, comes out in a jar, waits on a shelf, gets sold and, if the buyer is a café, gets paid a couple of weeks later. Only then is it back in your account. While it travels that route, it cannot pay the energy bill or an urgent purchase.
Stock is not the enemy. Without ingredients you cannot produce. The problem is excess stock: buying three months' worth of something you use in one.
How much money is in your stock
Once a month, count everything you hold:
- Ingredients: quantity × price you paid per unit (kg, litre, each).
- Packaging and labels: quantity × price per unit.
- Finished product: units × materials cost of each.
The total is the cash you have tied up. To make the count quick and orderly, the guide to simple inventory for small kitchens covers counting and reorder levels.
Days of inventory
A total on its own does not tell you whether it is a lot. For that, work out days of inventory:
days of inventory = stock value ÷ what you use per day (at cost)
What you use per day is the materials cost of a month's sales divided by 30. Do it item by item too: that is where the ones holding months of stock show up.
Worked example: granola jars
You sell 250 jars of granola a month to cafés and at a weekend market. The materials cost of one 500 g jar (oats, nuts, honey, jar, label) is $3.10. Your month-end count:
| Item | Working | Value |
|---|---|---|
| Oats | 25 kg × $1.60 | $40 |
| Nuts and seeds | 12 kg × $9.50 | $114 |
| Honey | 10 kg × $6.00 | $60 |
| Jars | 600 × $0.85 | $510 |
| Labels | 3,000 × $0.06 | $180 |
| Finished granola | 90 jars × $3.10 | $279 |
| Total | $1,183 |
What you use per day: 250 × 3.10 = $775 a month; 775 ÷ 30 = $25.83 a day.
Days of inventory: 1,183 ÷ 25.83 = 45.8 days. You have more than six weeks of cash on your shelves.
Where that cash is:
- Jars: 600 ÷ 250 a month = 2.4 months of stock.
- Labels: 3,000 ÷ 250 a month = 12 months of stock.
- Jars and labels together: 510 + 180 = $690, which is 690 ÷ 1,183 = 58.3% of the total.
The oats and honey are not the issue. More than half your tied-up cash is glass and paper.
What happens if you buy less. Your jar supplier charges $0.90 each in lots of 300, and the printer $0.09 a label for runs of 500. With those lots:
- Jars: 300 × 0.90 = $270.
- Labels: 500 × 0.09 = $45.
- New total: 40 + 114 + 60 + 270 + 45 + 279 = $808.
- New days of inventory: 808 ÷ 25.83 = 31.3 days.
- Cash freed: 1,183 − 808 = $375.
The price of freeing that cash. You pay more per unit: $0.05 more per jar and $0.03 more per label. At 250 jars a month that is (0.05 + 0.03) × 250 = $20 a month.
So the decision is this: is having $375 available worth $20 a month? If you have no use for that money, buy in bulk and keep the $20. If it lets you take on a new café account, or if without it you would have to borrow, $20 a month is cheap.
When holding more stock makes sense
Holding more than you use makes sense when:
- The bulk discount is large compared with what it costs to have that cash stuck.
- The ingredient gets more expensive at certain times of year and keeps well.
- Your supplier is unreliable and running out would stop production.
It stops making sense when the item spoils, takes space you do not have, might change (a new label design, a new recipe) or leaves you short of cash for everything else. The guide on when buying in bulk saves money does the full sum including waste and storage.
How to cut stock without running short
- Set a minimum and a maximum for each item. When you hit the minimum, restock up to the maximum. No more.
- Buy from your production plan. Start from what you will make this week, not from what was on offer.
- Look at slow items. Anything that has sat for months is cash that is not coming back; use it, sell it or stop buying it.
- First in, first out. Use the oldest stock first so you do not lose it to expiry.
- Watch finished product. Unsold finished jars are the most expensive kind of stock: you have already put in ingredients, packaging and your time.
Stock and the rest of your cash
Days of inventory are only part of the time your money is out. If cafés pay you at 14 days, in the example your cash was out for 46 + 14 = 60 days. After the change, 31 + 14 = 45 days. Fifteen fewer days shows up in your bank balance every week.
To see when you will be short, put your ingredient and packaging purchases into a weekly cash flow forecast: a big jar order is visible well in advance. The guide to cash flow for small food businesses shows how inventory fits with everything else coming in and going out.
Do it with the calculator
To value your finished product you need the materials cost per unit. Put your recipe into the food cost calculator and use that figure for your month-end count and your days of inventory.
Frequently asked questions
How many days of inventory should a small food business hold?
It depends on how often you can restock and how long each item keeps. Fresh ingredients, days; packaging, a few weeks is often enough if your supplier restocks quickly. Measure your current days and cut first the items holding the most money.
Does inventory count as profit?
No. It is money you have spent that has not turned into a sale yet. It only earns anything once you make it, sell it and get paid.
What price do I use to value my stock?
What you paid, not what you sell it for. If you bought jars at $0.85, each jar counts as $0.85, and finished product is valued at its materials cost.
Is buying packaging by the thousand a bad idea?
Not necessarily. It pays if the saving is bigger than what it costs you to have that money stuck. If it leaves you short of cash for ingredients or pushes you to borrow, the discount stops being worth it.