You’ve completed your business plan and signed the lease on your brick-and-mortar. Now that you know what your physical space will look like, it’s time for the fun part: planning your inventory. This is what makes your store unique, and your careful curation of independent brands will not only delight customers but also keep them coming back for more.
Before you start purchasing, you’ll need to do some planning. For-first timers, it can be hard to figure out where to start, from building a budget to identifying product trends. Luckily, this guide will get you moving in the right direction.
Inventory planning 101
What exactly is inventory planning? It’s how you figure out what to stock and how much to order. When done correctly, inventory planning allows you to:
- Purchase the right products to attract your target audience.
- Keep cash moving and avoid dormant inventory.
- Free up space for bestselling items.
- Ensure the products your customers want are always in stock.
This can, of course, feel daunting at first. The following questions will serve as helpful prompts as you are deciding what types of products—and in what quantity—might be right for your store and your customers.
What’s my budget?
Start with the finances when planning inventory for your new shop. If you don’t know what you can afford to buy, you don’t know what you can afford to sell.
There are numerous resources available about how to best manage your business’s money, and it can be confusing and time-consuming to wade through it all. That’s why only 54% of small businesses reported even having a budget. But having a budget in place can help you plan for your shop’s future and better evaluate your performance, positioning you to pivot accordingly as new challenges arise. Here’s a five-step process for building your inventory budget:
Start by estimating your revenue sources
Your revenue sources include all your potential sales from goods and any services your business will offer for a fee. If you aren’t sure yet exactly what your revenue will be, make conservative educated guesses, and regularly update the budget accordingly once you get started.
To help your estimate, consider current offerings in your area, any opportunity gaps between what’s trending and what’s already offered, and the amount of foot traffic in your neighborhood. For example, if it seems like there are plenty of clothing shops but limited stationery stores, perhaps this is a good opportunity to add those eco-friendly cards you’ve been considering to your lineup (especially if you ask around and the neighborhood seems like it’d be into something like that). If your shop is right on the main street, you’ll probably have higher revenue than one that’s tucked slightly farther back (at least for the first few months while you gain traction and build your reputation).
Tally your projected fixed costs
Projected fixed costs are expenses that recur every week, month, or year, like rent, utilities, internet, supplies, insurance, software (like POS and inventory tools), payroll, and website hosting.
Know that you’ll spend the most on inventory within the first three months of opening. Once you’ve narrowed down what products to stock, you’ll decide how much of each to buy (we’ll cover all of this in the next couple sections). Take a look at how much space you have, both for display and storage, and budget accordingly.
Consider variable costs
Variable costs are expenses that vary by month, like inventory, travel costs, materials, marketing, professional development, shipping and delivery, etc. Be sure to consider one-time investments, like hardware purchases or renovations.
Add a small contingency
A contingency helps cover any unexpected costs you might not be thinking of. Between 5% and 7% of your total budget is usually a good place to start. You could tap into your network of local shop owners to see if there are any area-specific costs you’re not considering.
See where it nets out
Now, it all comes together:
- Add up your income streams.
- Add up your expenses.
- Subtract your expenses from your income to see your probable net income.
Cash flow is a challenge for practically every shop owner, especially in the beginning. In the early days of your business, not only do you have increased overhead costs but you also don’t have revenue yet. To increase your cash flow before your store opens, consider applying to the Open with Faire program, which provides up to $20,000 in inventory financing with 60-day payment terms to purchase inventory on Faire.
This means you can stock up on products for your store’s grand opening and don’t have to pay until 60 days later—after you’ve started selling through your inventory. It takes less than 10 minutes to apply.
What should I buy?
Before you nail down your product assortment, it’s important to evaluate demand. Many successful new retailers start small by walking around the shopping district in their area, talking to local business owners. You’ll get an idea of what’s currently being sold, find out what product categories are over- or under-saturated, and develop a sense of foot traffic.
Not only will this result in valuable networking, but it’s also an easy way to explore potential partnerships and raise your own brand awareness. You can also extend your community outreach to prospective customers and neighbors: What do they want that they don’t currently have access to? What would they like to see from a store like yours?
In addition, it’s helpful to dig into available data about retail trends to help guide your buying. Start with some research—like reading Faire’s trend reports. You can also use Google Keyword Planner and Google Trends to see what products have piqued consumer curiosity so much that folks are searching for them online.
For example, let’s say you have a gourmet goods store and want to know which types of chocolate are currently popular. Check out Google Trends to see which flavors are most searched in your area.
How much should I buy?
After getting an idea of what to order, you need to determine how much to order. Here are three steps for helping you decide what quantities of products you’ll need:
Know your holding costs
This is how much it costs to store unsold inventory and should be considered when you’re determining when you’ll break even (which we’ll cover next). As a general rule of thumb, holding costs—also called inventory carrying costs—typically represent 10% to 30% of inventory value. Holding costs take into account rent, utilities, insurance, perishability, and other costs associated with holding unsold products in your space.
Let’s say you’re going to sell kitchen utensils in your store. You’ve dug into market trends and found a brand that makes spoons and coffee carafes that you love. The spoons are small—they don’t take up much space, so the holding costs are negligible. But the coffee carafes are larger and will require some dedicated space in your shop. Let’s look at how we might calculate the total holding cost for stocking the carafes:
Store square footage: 500 square feet
Square footage used by coffee carafe storage: 50 square feet (10% of store)
- Rent: $5,000/month ($10/square foot)
- Utilities: $300/month
- Total: $5,300/month
Total holding cost: $5,300/month x 10% = $530/month
So, now what? Let’s see how holding costs impact breaking even.
Know when you’ll break even
Before purchasing a given product, you should calculate how much you’d need to sell before you’d break even. Let’s return to our spoons and coffee carafes from above.
The brand sells the spoons in a minimum order quantity (MOQ) of 100 units, which you think you can sell based on your market research. Using the wholesale price and manufacturer’s suggested retail price (MSRP) of each spoon, you can determine at what point you’ll break even:
Number of units: 100 total units
Wholesale price: $2/unit
Total cost: $200
Break even: $200/$4 = 50 units
You’ll need to sell 50% of the spoons to break even.
Now, let’s move on to the coffee carafes. To keep things simple, let’s say you also need to buy 100 units. Given the holding costs we determined in the previous section, here’s how you would calculate your break-even for the carafes:
Number of units: 100 total units
Wholesale price: $20/unit
Holding costs: $5.30/unit
Total cost: $2,530
Break even with holding costs: $2,530/$40 = 63.25 units
You’ll need to sell over 63% of your carafes in order to break even.
As you can see from these two examples, holding costs impact how many products you need to sell to be successful. This means that you should consider buying smaller quantities of bulky or perishable products until you prove they’re strong sellers. Seeking out suppliers with low order minimums and MOQs is especially helpful as you’re starting off, when you’re still testing the waters.
On Faire, you can filter brands by order minimum and choose products you love that don’t require a large upfront purchase. Plus, you’ll reduce your overall purchasing risk with free returns on opening orders.
Tweak your buying strategy as you go
Throughout your first year, use data from your POS system to keep evaluating your inventory plan as you sell more of one product and less of another. Note top-performing items and stay on top of seasonal trends. Once you have a year’s worth of data, you can start experimenting with economic order quantity (EOQ) and reorder point formulas to further refine how much inventory you need to order and when.
Apply for inventory financing with 60-day payment terms
Ready to start planning your store’s inventory? You’ll need some cash. Read more about Open with Faire and learn how to apply for up to $20,000, with 60-day payment terms, to stock your new shop.