Available stock lets you serve customers. Excess stock ties up cash, takes up space and can lose value. Good inventory management finds a workable balance: the right products at the right time, with a level of risk your business can afford.
Key points
- Inventory uses cash before it generates sales.
- Track turnover, stockouts, slow-moving goods and the value you can actually recover.
- Adapt replenishment to supplier lead times, seasonality and the consistency of demand.
- Just-in-time purchasing is not suitable for every product, especially critical or hard-to-replace items.
The three objectives of inventory management
- Serve customers: have the promised products available when required.
- Preserve cash: avoid paying too early for goods that will sit on the shelf for months.
- Protect margins: limit losses, unsold goods and storage costs.
These objectives work together. Buying more may prevent a shortage, but uses cash and increases the risk of unsold products. The methods below help you decide where to strike the balance.
Understand what inventory really costs
The purchase price is only part of the cost. Add transport, handling, storage, insurance, losses and obsolescence. A bulk-order discount can be swallowed by several extra months of storage.
Cash tied up in goods is unavailable for wages or another purchase. Reducing excess inventory generally lowers your working capital requirement, provided it does not cause shortages that lose sales.
The accounts must also reflect damaged, outdated or hard-to-sell goods. Overvalued stock makes assets and profit look better than they are.
Match stock levels to demand
The right level depends on expected sales and how long replenishment takes. Building inventory before a busy season can be justified; retaining the same quantities afterwards may be expensive.
Classify products before setting purchasing rules
Not every stock item needs the same attention. ABC analysis groups items by their contribution to annual consumption value: high-value lines, an intermediate group and numerous lower-value items.
Add operational importance to that financial view. A cheap spare part can stop production if it is missing. Conversely, an expensive item that is readily available may not need a large safety stock.
For each group, decide how often to check it, how much to order and who is responsible. Perishable goods and durable spare parts should not follow identical rules.
| Product profile | Monitoring rule to adapt |
|---|---|
| Substantial cash tied up, with regular sales | Review forecasts and outstanding purchase orders frequently. |
| Low-cost but essential part | Hold suitable safety stock and identify an alternative supply. |
| Seasonal or perishable product | Set a final order date and a plan for unsold units. |
| Item with no sales for a long period | Decide on a supplier return, a specific offer or stopping purchases. |
Calculate a simple reorder point
The reorder point is expected demand during the delivery lead time plus safety stock.
Suppose average demand is 10 units per day, the supplier lead time is seven days and safety stock is 30 units. The reorder point is 10 × 7 + 30 = 100 units.
Consider units already on order and quantities reserved for customers. The calculation also assumes the averages remain representative. If demand or lead times become less predictable, review the safety stock and monitor the item more closely.
Use the inventory position to decide whether to order
Your reorder point is 100 units. There are 70 units in the warehouse, 50 already ordered from the supplier and 30 reserved for customers. If the timing and availability are compatible, the relevant inventory position is 70 + 50 − 30 = 90 units.
That is below the threshold, so review a new order. It does not mean you must automatically order ten units. Order size also depends on batch sizes, lead time, demand and cost. Do not count the 50 incoming units if they will arrive too late to meet the need.
Know what your safety stock actually protects against
At ten units of demand per day, 30 units of safety stock represent three days of average consumption. This absorbs some delays or demand changes, not every possible disruption. A five-day delivery delay exceeds that buffer.
The 100-unit reorder point assumes seven days of lead time and three days of safety stock. Recalculate it when demand, lead times or their variability change. A lasting increase in sales cannot be managed indefinitely with unchanged settings.
Also review outstanding orders and customer reservations. Ordering from the physical count alone can duplicate purchases or overlook commitments. Expected arrival dates matter as much as quantities.
Finally, distinguish cash released from profit earned. Selling an old item at its purchase cost recovers tied-up cash without creating a margin. Selling below cost may limit a future loss, but confirms an economic loss against the original purchase. If a write-down was already recorded, that full loss is not recognised a second time on sale. The decision may be sensible; understand its effect.
Measure inventory turnover and holding days
A common formula is inventory turnover = annual cost of goods sold ÷ average inventory. With annual cost of goods sold of CHF 120,000 and average inventory of CHF 20,000, stock turns over six times per year. On a 365-day basis, that is roughly 61 days in stock.
Use consistently valued figures. Comparing inventory at purchase cost with sales at retail prices distorts the result.
Track stockout rates, losses and items without movement too. A healthy overall turnover can hide individual products that have not sold for a year.
Coordinate purchasing with suppliers
Share useful forecasts, clarify lead times and check minimum order quantities. For sensitive products, arrange a backup supplier or a realistic buffer.
Just-in-time purchasing reduces inventory when supply is reliable. It becomes fragile when deliveries are slow, unpredictable or dependent on a single source. Compare lower holding costs with the consequences of a missed delivery.
Plan for seasonality. A retailer’s pre-holiday purchases should follow a sales scenario and include a fallback for unsold goods.
E-commerce: physical stock is not the same as sellable stock
You have 12 units in storage, but customers have already ordered three and one is damaged. Available-to-sell stock is 12 − 3 − 1 = 8 units, even though the physical count correctly finds 12. Your online store, till and marketplaces should show the same availability.
Reserve quantities when an order reaches the relevant validation stage and update every channel. Make a return available again only after inspection. With dropshipping, where the supplier sends directly to the customer, synchronise the supplier’s availability and lead time too. Not owning the stock does not remove the risk of selling unavailable goods.
Which inventory tool should you choose?
| Tool | When it can work | What to organise |
|---|---|---|
| Spreadsheet | A new business with simple movements tracked by one person. | One master list, backups and consistent recording of every movement. |
| Point-of-sale system with stock management | A shop where counter sales account for most stock leaving the business. | Supplier receipts, returns, losses and the connection to the online store. |
| Inventory software or ERP | Multiple users, warehouses or channels, with reservations and purchases to coordinate. | Common product references, access rights, entry rules and tested synchronisation. |
| Accounting software | Inventory valuation and reconciliation with the accounts at year-end. | A link to operational quantities; accounting does not always manage locations or reservations. |
Consider changing tools when duplicate entry, sales of unavailable products or unexplained differences become recurring problems. Product count alone is not decisive: ten lines sold through several channels can need more coordination than a larger range sold in one place.
Make stock records reliable and act on slow-moving goods
Record receipts, issues, returns and losses. Barcode scanning helps, but exceptions still need a procedure. Use cycle counts and a stocktake process suited to your organisation.
Five steps for a reliable stocktake
- Prepare locations and product references: tidy storage, identify units and separate damaged goods and items belonging to third parties.
- Control movements: pause receipts and dispatches during counting, or record them precisely so all quantities can be reconciled to the same date.
- Count the actual goods: use a list by location rather than copying the software’s expected quantities.
- Recount significant differences: look for an unrecorded receipt, missing issue or incorrect product reference before adjusting balances.
- Approve quantities and values: date the count sheets, identify those responsible and document adjustments with the accounting team.
For slow-moving goods, consider supplier returns, bundles, promotions or discontinuing the line. A discount can release cash, but calculate its margin impact before applying it widely.
Compare the outcome with your decisions: average inventory, customer availability, losses and cash. The objective is stock that serves the business without unnecessarily absorbing resources, rather than the lowest possible quantity.
How to take a year-end inventory
Romain Prieur explains how to prepare a stocktake, investigate differences and gather the information needed at year-end. The original video is in French.
Explore the Entreprendre en Suisse avec Sarah et Romain channel →
Connect the physical stocktake with the accounts
To understand gross margin, distinguish purchases from the goods actually sold. Consider a retailer with no losses or other unusual movements:
| Item at purchase cost | Amount |
|---|---|
| Opening inventory | CHF 2,000 |
| Purchases during the year | +CHF 5,000 |
| Closing inventory | −CHF 3,000 |
| Cost of goods sold | CHF 4,000 |
Treating all CHF 5,000 of purchases as cost of sales without adjusting for the inventory movement would distort gross margin by CHF 1,000. Goods still held at year-end have not all been consumed or sold.
Inventory appears as an asset on the balance sheet; its movement affects the calculation of merchandise expenses. The Swiss SME chart of accounts helps locate the relevant accounts.
Quantities must be reliable too. If the system shows 70 units at CHF 20 but the count finds 66, the difference is CHF 80. Establish whether this came from an unrecorded issue, a receipt error, a loss or the wrong product reference. Adjusting the value without correcting the process leaves the problem in place.
An accurate quantity does not guarantee an accurate value. Damaged or unsaleable goods require a valuation review even if they are physically on the shelf.
Under Article 960c CO, if estimated selling value less remaining costs is below acquisition or production cost, that lower value must be used. An item purchased for CHF 100 that can now sell for CHF 70, with CHF 5 of remaining costs, must be written down to CHF 65. The CHF 35 adjustment produces no cash receipt.
FIFO or weighted average: purchases at different prices
FIFO, or first in, first out, assumes the oldest units are sold first. Weighted average cost spreads total cost over available units. With ten units bought for CHF 10 and another ten for CHF 12, the average cost is 220 ÷ 20 = CHF 11 per unit.
If you sell ten units, the remaining stock is worth CHF 120 under FIFO or CHF 110 under weighted average, before any necessary write-down. Choose a suitable method, apply it consistently and use a lower value when valuation rules require it.
Switzerland’s one-third inventory reserve
The Swiss Federal Tax Administration accepts a tax reserve of up to one third of the value of goods held in inventory. Often called the “one-third inventory reserve” or “tiers sur stock”, this flat-rate reserve does not require proof of a loss for each item. It is separate from necessary write-downs for damaged or less saleable goods.
The process is straightforward: prepare a complete inventory showing quantities and prices, establish the correct goods value after any necessary write-downs, then record the reserve in the accounts. It applies to goods; it does not automatically extend to real estate or work in progress for third parties.
| Calculation | Amount |
|---|---|
| Goods value before the flat-rate reserve | CHF 90,000 |
| One-third reserve | −CHF 30,000 |
| Net balance-sheet value | CHF 60,000 |
If no reserve existed previously, creating it reduces taxable profit by CHF 30,000 in this example. That is not a CHF 30,000 tax saving: the saving depends on the tax rate. Physical quantities remain unchanged and the entry does not bring cash into the bank. Adjust the reserve to the inventory value at each year-end; a release increases profit.
Review the stock lines that matter most
Start with the goods tying up the most cash, items that have stopped moving and products whose absence would disrupt operations. Decide whether each needs replenishment, reduction, clearance or closer monitoring.
Our accounting service can help reconcile operational stock records with the values in your accounts and the effect on your cash flow.
Frequently asked questions about inventory management
Does reducing inventory always increase profit?
No. It can release cash, but stockouts or clearance sales below cost can reduce profit. A write-down lowers the recorded inventory value without generating a cash receipt.
What is a good inventory turnover rate?
It depends on the sector, lead times and product type. Compare your product groups and how they change over time, alongside availability and losses.
Does inventory software replace physical stocktaking?
No. Physical differences, losses and recording errors still require checks and reconciliation.
Can a Swiss business create a one-third inventory reserve?
Yes. The Federal Tax Administration accepts a flat-rate reserve of up to one third of the value of goods, based on a complete inventory and correct accounting. On CHF 90,000 of goods before the reserve, it can reach CHF 30,000, leaving CHF 60,000 on the balance sheet.
When should I replace a spreadsheet with inventory software?
When several people or sales channels need shared availability, or duplicate entry and unexplained differences recur. Compare reservation, traceability and synchronisation needs rather than relying on an arbitrary product-count threshold.
Sources and further reading
- Swiss Code of Obligations, Article 958c: supporting balances with an inventory.
- Swiss Code of Obligations, Articles 960a and 960c: inventory valuation.
- SECO SME Portal: business monitoring and inventory indicators.
- Solothurn Tax Administration: one-third goods reserve and inventory records (German).
- Vaud Tax Administration: inventory reserve, section 3.2.2 (French).
Romain Prieur is a Swiss Certified Public Accountant and founder of Entreprendre.ch. With more than ten years of experience in audit and business advisory in Switzerland, he advises entrepreneurs on company formation, accounting and tax.
