How to make the “right” inventory & purchasing decisions for your new business?

An effective purchasing and inventory system is mandatory. If purchasing is made haphazardly and the inventory is not managed properly, the business could face major losses.

While making these decisions, consider the hidden costs of keeping too much inventory on hand. These costs will include:

  • Financing costs: The interest expense associated with the purchases.
  • Opportunity costs: Alternative income producing use of money tied up in inventory
  • Insurance costs: Insurance costs will increase if more inventory is carried
  • Storage costs: This cost is applicable if the space to store the inventory is leased or purchased.
  • Obsolesce cost: The loss of sales that occur when new and improved models are introduced and consumers no longer want the “old” items in your inventory.
  • Shrinkage costs: Loss due to breakage, damage, spoilage or theft of your inventory.

For the above reasons, having a huge inventory can be very costly. Having a small inventory on the other hand results in frequent buying. This also turns out very costly.

Therefore, there should be some optimum number of units one should purchase per order. To find out what this optimum number of units is, use the following formula:

Formula for calculating the EOQ


  • EOQ : is the “economical order quantity” or the optimum quantity to purchase per order
  • S : is the estimated annual sales
  • V : is the variable costs to place an order
  • I : is the inventory holding costs as a percentage of average inventory
  • C : is the cost of one item

Using this formula, you can find the quantity of units one should purchase every time the inventory is to be replaced.

Next - How to make the “right” marketing decisions? >>

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Table Of Contents

  1. How to start a company? – Introduction
  2. Is your new business idea “really” that brilliant?
  3. How to make a “perfect” business plan? & Why make one?
  4. Business plan - Step 1 – Understanding your business!
  5.             Step 2 – What do “you” want? (Personal objectives)
  6.             Step 3 – How to form business objectives? & Why?
  7.             Step 4 – How to make the “right” business decisions?
  8.                      - Making the right legal decisions
  9.                      - Making the right production decisions
  10.                      - Making the right hiring decisions
  11.                      - Making the right inventory decisions
  12.                      - Making the right marketing decisions
  13.             Step 5 – Estimating the capital required
  14.             Step 6 – How to “draft” the perfect business plan?
  15. How to raise the capital required for your business?