How much of your cash is sitting on the shelf

Turn stock days into rupees with a worked example, then free that cash with three levers you control - reorder discipline, dead stock and supplier terms.

To reduce the money stuck in inventory, first put a rupee figure on it. Work out how many days of sales your stock covers, multiply the extra days by your daily cost of goods sold, and that is the cash you could release. Then use three levers: order to a reorder point instead of by feel, clear dead stock, and get supplier terms that line up with how fast you sell.

How do I turn stock days into rupees?

Two numbers from your books are enough.

Stock days = value of stock on hand at cost ÷ average cost of goods sold per day

Average daily cost of goods sold is your purchase cost of goods sold over a period, divided by the number of days in it. Use 90 days if you can, so one unusual week does not distort the figure.

Once you know your stock days, choose a target that fits your lead times and service level. Then:

Cash you can release = (current stock days − target stock days) × daily cost of goods sold

This turns a vague feeling that "the godown is too full" into a number your accountant can plan around.

Can you show a worked example?

All numbers here are illustrative. Take a hardware distributor:

Cost of goods sold over the last 90 days: ₹27,00,000
Average daily cost of goods sold: ₹27,00,000 ÷ 90 = ₹30,000
Stock on hand, valued at cost: ₹18,00,000
Stock days: ₹18,00,000 ÷ ₹30,000 = 60 days

The owner looks at supplier lead times and safety stock and decides 40 days of cover is enough.

Extra days: 60 − 40 = 20
Cash that could come off the shelf: 20 × ₹30,000 = ₹6,00,000

That ₹6 lakh is not profit. It is cash that is already yours and is currently sitting in boxes. Released, it can pay suppliers on time, fund a better-selling line, or cut down on borrowing.

Split the figure by category, because the overall number hides where the problem is:

Category	Stock at cost (₹)	Daily COGS (₹)	Stock days
Fast-moving fasteners	3,00,000	15,000	20
Plumbing fittings	6,00,000	10,000	60
Power tools	9,00,000	5,000	180
Total	18,00,000	30,000	60

Illustrative figures. The fasteners are lean. The power tools hold half the stock value and cover six months. That is where to look first.

Lever 1: How does reorder discipline free up cash?

Most excess stock comes from ordering by habit: a fixed amount every visit, a top-up whenever the shelf looks thin, or a bigger order because the salesman offered a scheme.

A reorder point changes that. You order when stock falls to a calculated level, and you order enough to cover a period, not to fill the shelf. Our guide to the reorder point formula shows how to set it from average daily use, measured lead time and safety stock.

What to do:

Set a reorder point for each item, starting with your top items by stock value.
Check against stock position (on hand plus on order, minus what is committed to customers), so you do not order twice for the same shortfall.
Order smaller quantities more often where the supplier allows it. Halving the order size roughly halves the average cycle stock you carry.
Give fast, high-margin items generous safety stock and slow items a thin one.

Lever 2: What should I do with dead stock?

Dead stock is stock that has not sold in a long time and is unlikely to. It is the worst kind of locked cash, because it also takes up space, gets counted at every stock-take and loses value as it ages.

Find it first. Run an ageing report by last sale date and sort by value at cost. Choose a cut-off that suits your trade: a few weeks for fashion or dated goods, longer for spares.

Then act, roughly in this order:

Return or exchange with the supplier where your arrangement allows it.
Bundle slow items with fast movers, or offer them to regular parties at a clearing price.
Transfer to another branch or shop where the item does sell.
Liquidate to a stock-lot buyer, and accept the loss.
Write off what cannot be sold, with your accountant's guidance on the correct treatment in your books and for GST.

Recovering part of the cost now is usually better than holding the full cost on paper forever. Then fix the cause, so the same mistake is not repeated next season. For dated goods, a first-expiry-first-out rule stops stock from ageing in the first place; see FIFO, LIFO and FEFO explained.

Lever 3: How do supplier terms change the picture?

Stock days measures how long cash sits on the shelf. Supplier credit measures how long you can hold the goods before paying. The gap between the two is what you actually fund yourself.

In the example, with 60 stock days and 30 days of supplier credit, the business funds 30 days of stock from its own cash. Get to 40 stock days with the same credit and it funds only 10 days.

Things to negotiate, depending on the relationship:

Longer credit on slow-moving lines, where you hold stock longest.
Smaller minimum order quantities, even at a slightly higher rate, if the bigger order would sit for months.
Return or exchange terms for unsold seasonal goods.
Shorter, more reliable lead times, which let you carry less safety stock.
Consignment for new or uncertain lines, where you pay only after selling.

Be wary of a volume discount that buys you three months of cover on a slow item. You save a little on the rate and lock up a lot of cash. Distributors handling many suppliers and brands will find more on this in our wholesale distributor inventory guide.

What are the common mistakes?

Valuing stock at selling price. It overstates the cash locked up and confuses the calculation.
Looking only at the total. One overall stock-days figure hides a category sitting at six months.
Cutting stock on fast movers first. Stockouts on your best sellers cost more than the cash they free.
Clearing dead stock without fixing the cause. If the buying habit stays, the godown fills again.
Trusting book stock without counting. If the system and the shelf disagree, every figure here is wrong. A cycle count of high-value items comes first.

When does this not apply?

Holding extra stock on purpose can be the right call. Building stock ahead of a festival peak or a known supply disruption raises stock days for a while, and that is planned, not waste. A newly launched line will show unusual numbers until it has a few months of sales history. And some goods, such as long-lead imported parts, need more cover by their nature. The method still works; just set a separate target for these items rather than holding them to the shop-wide figure.

FAQ

What are stock days, in plain words? Stock days is how many days your current stock would last at your normal rate of selling, if you stopped buying today. To get it, divide the value of the stock you hold by the average cost of goods you sell in a day. A higher number means more of your cash is waiting on the shelf.

Should I value stock at purchase cost or at selling price? Use purchase cost, also called landed cost, and keep it consistent. The cash you have locked up is what you paid for the goods, not what you hope to sell them for. If you value stock at MRP or at selling price, the number looks bigger than the cash you really have tied up.

Is it safe to cut stock on my fast-moving items? Be careful with these. Fast movers earn their place, and running out of them costs you sales and customers. Look at slow and dead items first, where most of the extra cash usually sits. For fast movers, tighten reorder points with measured lead times instead of cutting cover without a reason.

How often should I calculate stock days? Monthly is enough for most shops and distributors, using the closing stock value and that month's cost of goods sold. Track the overall figure and the figure for your biggest categories. The trend matters more than any one month, so watch the direction over a quarter before acting on it.