Inventory Glossary for Small Businesses: Simple Terms You Need to Know
Inventory can make or break your small business. Whether you’re running a retail store, wholesale business, or manufacturing unit, knowing the language of inventory management is key to staying ahead. This glossary includes 121 inventory terms, simplified for small business owners and operations teams, with practical applications and tools to help you grow.
A
ABC Analysis
A way to group your products by importance. “A” items are your most valuable products (think 20% of items that bring 80% of profit). “B” items have moderate value. “C” items are low-value products that make up most of your inventory but bring less profit.
ABC analysis helps you focus your attention and resources on your most profitable items. As a retailer or wholesaler, you’ll know which products deserve premium shelf space and tighter inventory control.
Allocated Stock
These are items you’ve set aside for customer orders that haven’t shipped yet. These aren’t available to sell to someone else.
Allocated stock prevents accidentally selling the same item twice. For wholesalers fulfilling larger orders, knowing what’s already promised to customers helps avoid embarrassing stockout situations.
Automated Inventory System
Automated Inventory System is a technology that tracks your inventory without manual counting. Usually uses barcodes or scanners to update your stock levels automatically when you buy or sell items.
Automated Inventory system saves countless hours of manual counting and dramatically reduces errors. Retail stores can operate more efficiently while wholesalers can manage larger product catalogs without adding staff.
Average Cost Method
The Average Cost Method is a way to value your inventory by taking the average cost of all units you’ve purchased. It helps smooth out price changes when calculating the cost of goods sold.
Average Cost Method simplifies accounting and provides consistent pricing, especially when you purchase the same product at different prices. Helps retailers maintain steady margins despite fluctuating wholesale costs.
B
Backorder
This is when a customer orders something you don’t have in stock, but you’ll ship it when it arrives from your supplier.
Backorder allows you to capture sales even when items are temporarily out of stock. Especially important for wholesalers dealing with specialty items that may have longer lead times.
Barcode
What it is: The familiar pattern of lines and numbers printed on products that can be scanned to identify items quickly during sales and inventory counts.
Why it matters: Speeds up checkout, reduces manual entry errors, and enables accurate inventory tracking. Essential for retailers processing multiple sales daily and wholesalers managing large shipments.
Batch Tracking
What it is: Tracking groups of products made at the same time or sharing the same expiration date. Essential for food, medicine, or anything with a limited shelf life.
Why it matters: Critical for managing perishable items and handling potential recalls. Allows retailers selling food or pharmaceuticals to ensure they’re selling fresh products and can quickly identify affected items if suppliers report issues.
Buffer Stock (Safety Stock)
What it is: Extra inventory you keep on hand in case of unexpected demand or delays from suppliers. Your insurance against stockouts.
Why it matters: Protects your business from lost sales when demand spikes or shipments are delayed. Especially crucial for retailers selling seasonal items and wholesalers who need to maintain reliable delivery promises.
Bundling
What it is: Selling multiple individual products together as one package or kit. Requires tracking both the individual items and the bundle.
Why it matters: Increases average order value and helps move slower-selling items. Retailers can create gift packs while wholesalers can offer volume-based assortments to boost sales.
C
Carrying Cost
What it is: The total cost of holding inventory, including storage, insurance, taxes, and the money you could have earned if you’d invested elsewhere instead of buying stock.
Why it matters: Often accounts for 20-30% of inventory value annually. Understanding these costs helps retailers and wholesalers avoid tying up too much capital in slow-moving stock.
Consignment Inventory
What it is: Products a supplier lets you keep in your store, but you only pay for them after they sell. The supplier still owns them until then.
Why it matters: Reduces financial risk when testing new products. Retailers can expand their selection without upfront investment, while wholesalers can offer this arrangement to retailers to encourage them to carry more product lines.
Cost of Goods Sold (COGS)
What it is: The direct costs of the products you’ve sold, including materials and labor. Used to calculate your gross profit.
Why it matters: A key figure for calculating your profitability and filing taxes accurately. Both retailers and wholesalers need to track COGS meticulously to ensure pricing strategies maintain healthy margins.
Cycle Counting
What it is: Counting a small portion of your inventory regularly instead of all at once. This helps find problems without shutting down for a full inventory count.
Why it matters: Maintains accuracy without disrupting business operations. Retailers can count a few shelves each day, while wholesalers can systematically verify sections of their warehouse without stopping shipments.
D
Days Inventory Outstanding (DIO)
What it is: How many days, on average, your inventory sits on shelves before selling. Calculated as: (Average Inventory ÷ Cost of Goods Sold) × 365 days.
Why it matters: Reveals how quickly you’re turning over stock. A high DIO could signal overstocking or obsolete inventory, especially problematic for retailers with limited shelf space or wholesalers with warehouse storage costs.
Dead Stock
What it is: Items that haven’t sold in a long time and probably never will. These tie up your money and take up valuable space.
Why it matters: Drains cash flow and wastes storage space. Identifying dead stock allows retailers to clearance items while wholesalers might consider liquidation options to free up capital for better-performing products.
Demand Forecasting
What it is: Predicting how much of each product you’ll sell in the future so you can order the right amounts.
Why it matters: Prevents both stockouts and overstocking. Accurate forecasting helps retailers prepare for seasonal sales while wholesalers can better manage warehouse space and purchasing schedules.
Drop Shipping
What it is: A setup where you sell products but your supplier ships directly to your customers. You never physically handle the inventory.
Why it matters: Eliminates inventory investment and shipping hassles. Online retailers can offer a wider selection without warehousing costs, while wholesalers can provide this service to retailers wanting to expand their catalog without increasing inventory.
E
E-commerce Integration
What it is: Connecting your inventory system with your online store so stock levels update automatically when online sales happen.
Why it matters: Prevents overselling and the embarrassment of canceling orders. Essential for retailers with both physical and online stores or wholesalers managing B2B portals alongside other sales channels.
Economic Order Quantity (EOQ)
What it is: A formula that calculates the ideal order size to minimize your total costs of ordering and storing inventory.
Why it matters: Balances ordering costs against storage costs. Helps retailers optimize purchase quantities while wholesalers can reduce overall inventory management expenses through more efficient ordering.
Expiration Date Tracking
What it is: Monitoring when perishable items will expire so you can sell them in time and avoid waste.
Why it matters: Reduces losses from expired products and ensures customers get fresh items. Critical for retailers selling food, beauty products, or medications and wholesalers distributing perishable goods.
F
FIFO (First-In, First-Out)
What it is: Selling or using your oldest inventory first. Essential for perishable goods and usually provides the most accurate inventory valuation.
Why it matters: Reduces spoilage and ensures customers get fresher products. Retailers selling perishable goods minimize waste, while wholesalers maintain product quality through proper rotation.
Fill Rate
What it is: The percentage of customer orders you can fulfill immediately from stock without backorders or delays.
Why it matters: Directly impacts customer satisfaction. A high fill rate helps retailers maintain customer loyalty, while wholesalers with strong fill rates become preferred suppliers for retailers needing reliable inventory.
G
Goods In Transit
What it is: Inventory that has been shipped from your supplier but hasn’t arrived at your location yet.
Why it matters: Affects cash flow and planning. Retailers need to know when new merchandise will arrive to plan promotions, while wholesalers track in-transit goods to manage customer commitments.
H
Hot Stock
What it is: Your fastest-selling items that need frequent reordering.
Why it matters: These products drive revenue and customer traffic. Retailers should ensure hot stock is always available, while wholesalers should prioritize these items in their warehouse organization for quick picking and shipping.
I
Inventory Aging
What it is: Tracking how long items have been sitting in your inventory to identify slow-moving products before they become dead stock.
Why it matters: Helps prevent inventory from becoming obsolete. Retailers can create targeted promotions for aging stock, while wholesalers can adjust purchasing patterns before items lose value.
Inventory Shrinkage
What it is: The loss of inventory from theft, damage, errors, or other reasons besides sales. The difference between what your records say you should have and what you actually have.
Why it matters: Directly impacts your bottom line. Retail shrinkage averages 1.4% of sales annually—controlling it can significantly boost profitability for both retailers and wholesalers.
Inventory Turnover Ratio
What it is: How many times you sell and replace your inventory in a period. Calculated as: Cost of Goods Sold ÷ Average Inventory Value. Higher is usually better.
Why it matters: Indicates efficiency in using inventory investment. Retailers aim for higher turnover to maximize sales per square foot, while wholesalers use it to measure warehouse efficiency and product performance.
J
Just-In-Time (JIT) Inventory
What it is: Receiving goods only right when you need them for production or sales. Reduces storage costs but requires reliable suppliers.
Why it matters: Minimizes inventory carrying costs and space requirements. Works well for retailers with predictable demand and wholesalers with strong supplier relationships and efficient operations.
K
Kanban
What it is: A visual system using cards or signals to indicate when it’s time to reorder products. Originally from Japanese manufacturing.
Why it matters: Simplifies inventory management for small teams. Retailers can use simple visual cues instead of complex systems, while wholesalers can apply Kanban principles to warehouse sections for easier management.
Kitting
What it is: Assembling individual products into ready-to-sell packages. Similar to bundling.
Why it matters: Creates higher-value offerings and simplifies customer purchasing. Retailers can create gift sets or starter packs, while wholesalers can offer pre-assembled displays or multi-packs that save retailers time.
L
Lead Time
What it is: The time between placing an order with your supplier and receiving the goods. Critical for knowing when to reorder.
Why it matters: Determines how far in advance you need to place orders. Longer lead times require retailers to plan further ahead, while wholesalers need to account for lead times when making delivery promises to customers.
LIFO (Last-In, First-Out)
What it is: Selling or using your newest inventory first. Less common than FIFO and not allowed in some countries, but can have tax advantages in places like the US during inflation.
Why it matters: Can provide tax benefits during inflation by recognizing higher costs. Some wholesalers may use LIFO for non-perishable goods to optimize tax situations, though retailers rarely benefit from this approach.
Low Stock Alert
What it is: A notification that triggers when inventory for an item falls below a set level, prompting you to reorder.
Why it matters: Prevents stockouts by automating the reordering process. Retailers can maintain shelf inventory without constant monitoring, while wholesalers can ensure popular items are always available for customer orders.
M
Min/Max Inventory Control
What it is: Setting minimum and maximum levels for each product. When stock hits the minimum, you order enough to reach the maximum.
Why it matters: Automates ordering decisions and prevents both stockouts and overstock. Works well for retailers with stable demand patterns and wholesalers wanting to standardize inventory management across product lines.
Multi-Channel Inventory Management
What it is: Tracking inventory across all your sales channels (store, website, marketplaces) to prevent overselling.
Why it matters: Essential for businesses selling through multiple platforms. Prevents the embarrassment and cost of canceling orders when retailers sell the same inventory online and in-store, or when wholesalers manage both direct sales and distribution channels.
N
Net Realizable Value (NRV)
What it is: The estimated selling price of inventory minus costs of completion, transportation, and selling. Used when determining if inventory value needs to be written down.
Why it matters: Ensures your balance sheet accurately reflects inventory value. Important for both retailers and wholesalers when calculating year-end financials, especially for fashion or technology products that depreciate quickly.
O
Obsolete Inventory
What it is: Items that are outdated or no longer sellable at full price due to newer models or changing markets.
Why it matters: Ties up capital in products that won’t sell at full margin. Retailers and wholesalers in fashion, technology, or seasonal businesses particularly need strategies to identify and liquidate obsolete stock quickly.
On-Hand Inventory
What it is: The physical stock currently available in your business, not including items on order or allocated to customers.
Why it matters: Shows what’s actually available to sell right now. Retailers need accurate on-hand figures for daily operations, while wholesalers rely on this information to confirm orders can be fulfilled immediately.
Order Cycle
What it is: The time between placing successive inventory orders, including the ordering process, delivery, and time until the next order.
Why it matters: Affects cash flow planning and warehouse operations. Retailers can optimize staffing for receiving shipments, while wholesalers can better coordinate inbound and outbound logistics.
P
Par Level
What it is: The minimum quantity of an item you want to have on hand at all times.
Why it matters: Simplifies inventory management for essential items. Retailers commonly use par levels for staple products, while wholesalers might set them for their most consistently ordered items.
Perpetual Inventory System
What it is: A method that updates your inventory records continuously with each purchase and sale, giving you real-time stock levels.
Why it matters: Provides accurate stock information without constant manual counting. Essential for retailers with high transaction volumes and wholesalers managing thousands of SKUs across multiple locations.
Physical Inventory Count
What it is: Manually counting all inventory items to verify your records match reality. Usually done annually or quarterly.
Why it matters: Ensures accounting accuracy and identifies shrinkage issues. Required for financial reporting and helps both retailers and wholesalers identify and resolve inventory discrepancies.
Purchase Order (PO)
What it is: A document you send to suppliers detailing the products, quantities, and prices you want to buy.
Why it matters: Creates a clear record of what was ordered and helps track expected deliveries. Retailers use POs to maintain order history, while wholesalers rely on them to manage larger, more complex orders from numerous suppliers.
Q
Quantity Discounts
What it is: Price reductions offered by suppliers when you buy larger quantities in a single order.
Why it matters: Can significantly reduce per-unit costs. Retailers must balance these savings against higher carrying costs, while wholesalers often leverage quantity discounts to improve margins when selling smaller quantities to retailers.
R
Raw Materials Inventory
What it is: Components and supplies used in manufacturing that haven’t been converted into finished products yet.
Why it matters: For wholesalers who assemble or manufacture products, tracking raw materials ensures production can continue without interruption. Some retailers with custom products also need to manage raw materials inventory.
Reorder Point
What it is: The inventory level that triggers a new order. Usually calculated based on lead time and daily usage: (Average Daily Usage × Lead Time) + Safety Stock.
Why it matters: Prevents stockouts while minimizing excess inventory. Both retailers and wholesalers rely on accurate reorder points to maintain optimal stock levels without constant manual monitoring.
Return to Vendor (RTV)
What it is: The process of sending defective, expired, or unsold items back to your supplier for credit or replacement.
Why it matters: Recovers value from problematic inventory. Retailers need clear RTV processes to manage damaged goods, while wholesalers need systems to handle returns from both their customers and their suppliers.
RFID (Radio Frequency Identification)
What it is: Technology using tags that can be detected without direct scanning, allowing for faster inventory tracking than traditional barcodes.
Why it matters: Speeds up inventory counts and improves accuracy. Larger retailers use RFID to count inventory quickly, while wholesalers can track pallets and cases through warehouses more efficiently.
S
Safety Stock
What it is: See Buffer Stock.
Seasonal Inventory
What it is: Products that sell primarily during specific times of the year, requiring careful planning to avoid overstocking after the season.
Why it matters: Requires special planning and forecasting. Retailers need strategies to sell through seasonal items before they become irrelevant, while wholesalers must manage purchasing and warehouse space for dramatic demand fluctuations.
SKU (Stock Keeping Unit)
What it is: A unique code assigned to each distinct product and variation you sell, used to track inventory and sales.
Why it matters: The foundation of all inventory tracking. Well-organized SKU systems help retailers locate products quickly and wholesalers manage large product catalogs efficiently.
Slow-Moving Inventory
What it is: Items that sell more slowly than your average stock, requiring monitoring to prevent them from becoming dead stock.
Why it matters: Warning sign of potential future write-offs. Identifying slow movers early allows retailers to create promotions, while wholesalers might offer special pricing to move these items before they lose value.
Stock Rotation
What it is: Moving older inventory to the front so it sells before newer stock, especially important for perishable goods.
Why it matters: Reduces waste and ensures customers get fresher products. Critical for retailers selling perishable goods and wholesalers managing products with expiration dates.
Stockout
What it is: Running completely out of an item, resulting in lost sales and disappointed customers.
Why it matters: Damages customer loyalty and revenue. Stockouts cost retailers billions annually in lost sales, while wholesalers who frequently can’t fulfill orders risk losing clients to more reliable competitors.
T
Three-Way Match
What it is: Verifying that your purchase order, receiving document, and supplier invoice all match before payment, ensuring you only pay for what you ordered and received.
Why it matters: Prevents overpayment and catches shipping errors. This verification process helps retailers avoid paying for undelivered goods and wholesalers manage complex, high-value orders accurately.
U
Unit Cost
What it is: The price you pay for a single unit of inventory, used to calculate total inventory value and cost of goods sold.
Why it matters: Forms the foundation of your pricing strategy. Retailers need accurate unit costs to maintain margins, while wholesalers use this figure to set competitive prices while ensuring profitability.
Unit of Measure (UOM)
What it is: How you count or measure each product (each, dozen, pound, gallon, etc.).
Why it matters: Ensures accuracy in ordering and selling. Retailers must maintain consistent UOMs for proper inventory tracking, while wholesalers often manage products with different UOMs for purchasing versus selling.
V
Vendor-Managed Inventory (VMI)
What it is: An arrangement where your supplier monitors and maintains your inventory levels, deciding when to send more stock based on your usage or sales data.
Why it matters: Reduces your inventory management burden. Some retailers use VMI for staple products, while wholesalers might offer VMI services to their retail customers as a value-added service.
W
Warehouse Management System (WMS)
What it is: Software designed to manage and optimize warehouse operations, including inventory locations, picking, and shipping.
Why it matters: Essential for efficient operations beyond a certain size. Mid-sized retailers benefit from location tracking features, while wholesalers rely on WMS to manage complex picking and shipping processes.
Write-Down
What it is: Reducing the recorded value of inventory when its market value falls below its cost. Recorded as an expense.
Why it matters: Ensures financial statements accurately reflect inventory value. Both retailers and wholesalers must periodically evaluate inventory for potential write-downs, especially for fashion, technology, or seasonal goods.
Write-Off
What it is: Completely removing the value of inventory from your books when it becomes unsellable. Also recorded as an expense.
Why it matters: Necessary for items that can’t be sold at any price. Properly managing write-offs helps retailers and wholesalers maintain accurate financial statements and make better purchasing decisions.
Y
Year-End Inventory
What it is: The physical count and valuation of all inventory items at the end of your fiscal year for tax and financial reporting.
Why it matters: Required for accurate financial statements and tax filings. Both retailers and wholesalers must conduct thorough year-end counts to verify inventory values for annual reports and tax submissions.
Z
Zero Inventory
What it is: A theoretical goal where products arrive exactly when needed without maintaining stock. In practice, it usually refers to a stockout situation.
Why it matters: While pure zero inventory is rarely achievable for retailers or wholesalers, the concept encourages leaner inventory management practices that reduce carrying costs without sacrificing availability.
Managing inventory effectively can be the difference between struggling and thriving as a small business. With the right tools like Vencru, you can automate many inventory processes—from tracking stock levels to sending low stock alerts—so you can focus on growing your business instead of counting products.
