Inventory and invoicing terms, explained

ABC analysis ranks inventory items by their share of annual consumption value: A items are the few that make up most of the value, B items the middle, and C items the many that make up little.

Cycle counting is counting a small, rotating set of inventory items on a regular schedule, so every item is counted several times a year without closing for a full stock take.

Dead stock is inventory that hasn't sold for a long period — often six months or more — and is unlikely to sell at its normal price.

Economic order quantity is the order size that minimises the combined yearly cost of placing orders and holding stock for an item.

FEFO is a picking rule that sells or ships the batch with the earliest expiry date first, whatever order it arrived in.

FIFO is an inventory valuation method that assumes the oldest units are sold first, so closing stock is valued at the most recent purchase costs.

A goods received note is the record a business makes when a delivery arrives, showing what was actually received, in what quantity and condition, against the purchase order.

Holding cost is the total cost of keeping unsold inventory over a period, usually a year — capital tied up, storage, handling, insurance and shrinkage, and obsolescence.

Inventory turnover is how many times a business sells through its average inventory in a period, usually a year.

A reorder point is the stock level at which you place a new order, so the delivery arrives before you run out.

Safety stock is extra inventory held as a buffer against higher-than-expected demand or slower-than-expected supplier deliveries.

Shrinkage is inventory recorded in your books that is no longer physically there — lost to theft, damage, spoilage, or recording and receiving errors.

A SKU is a business's own code for one specific sellable item — one product in one size, colour or pack — used to track its stock and sales.

Weighted average cost is an inventory valuation method that values every unit at the average cost of all units available, recalculated as new stock is bought or once per period.