How much inventory should you carry? This is a question I sometimes get from clients. Carrying too much consumes cash that might be put to other uses while running out of stock can lead to missed sales and lost customers. For small businesses and startups, being wrong in either direction can put the survival of the company at risk.

One common “solution” is to carry X months of stock. It sounds easy and comfortable. If we just buy enough inventory to cover overselling or late deliveries everything will be fine.

The problem is that no human being can make time! We make products and the conversion of time to units requires a forecast. Paradoxically, the less mature the company, the lower the volume of sales, the less accurate the forecast.

What is a manager to do?

How Much Inventory Should You Carry?

This is a common question among business owners, and the answer is both crucial and complex. Carrying too much inventory ties up cash that could be used for other critical needs, while carrying too little risks stockouts, lost sales, and dissatisfied customers. For small businesses and startups, mismanaging inventory—whether by overstocking or understocking—can jeopardize the entire operation.

The Temptation of the “X Months of Stock” Rule

A common approach to inventory management is to maintain a fixed amount of stock—say, three or six months' worth—assuming this will safeguard against fluctuations in demand and supply chain delays. This method feels comfortable, as it provides a buffer against unexpected events. However, it oversimplifies a much more dynamic problem.

The core issue with this approach is that time itself is not a physical resource. Businesses don’t sell “months” of inventory; they sell units. The conversion of time into stock levels requires an accurate forecast. The paradox is that the less mature the company, the lower the sales volume, and the harder it is to make accurate predictions. Startups and small businesses experience greater demand volatility, making a rigid inventory strategy less effective.

The Real Solution: Data-Driven Inventory Management

Rather than relying on arbitrary stock levels, managers should take a more analytical approach. Here are some key strategies:

1. Use Demand Forecasting

• Analyze historical sales data to identify trends.
• Consider seasonality, market conditions, and external factors that influence demand.
• Regularly update forecasts based on actual sales and customer behavior.

1. Adopt a Just-in-Time (JIT) Approach When Possible

• JIT minimizes excess inventory by ordering stock only as needed.
• This approach reduces holding costs but requires strong supplier relationships and reliable lead times.

1. Segment Inventory Based on Demand Volatility

• High-turnover products should have higher safety stock levels.
• Slow-moving items should be stocked conservatively to avoid overinvestment.
• Use an ABC analysis (categorizing inventory by importance) to prioritize stock levels.

1. Monitor Inventory Turnover Ratio

• The inventory turnover ratio (cost of goods sold ÷ average inventory) helps assess how efficiently inventory is managed.
• A low turnover suggests overstocking, while a high turnover may indicate frequent stockouts.

1. Maintain a Safety Stock for Uncertainty

• Safety stock is a buffer against unexpected demand spikes or supply chain disruptions.
• The amount should be calculated based on demand variability and supplier reliability, not a fixed “X months” rule.

1. Implement Real-Time Inventory Tracking

• Use inventory management software to track stock levels and movements.
• Automated alerts for low stock can prevent stockouts.

Conclusion

There is no one-size-fits-all answer to how much inventory a business should carry. The right balance depends on demand variability, supplier reliability, and available capital. Instead of relying on arbitrary stocking rules, businesses should embrace data-driven forecasting, dynamic inventory segmentation, and real-time tracking. By doing so, they can optimize cash flow, minimize waste, and maintain a steady supply of products to meet customer demand—ensuring both short-term stability and long-term success.