A reorder point is the inventory level that triggers placing a new order — set it too low and you risk running out before the new stock arrives; set it too high and you’re tying up cash in inventory you don’t need yet. For small businesses, getting this balance right is critical. Running out of stock can mean lost sales and disappointed customers, while overstocking ties up working capital that could be invested elsewhere in your business.
The basic calculation
The foundation of inventory management is understanding when to reorder. The standard formula is:
Reorder point = (Average daily usage × Lead time in days) + Safety stock
This calculation tells you the exact inventory level at which it’s time to reorder, based on how long you can expect to wait for new stock to arrive. Let’s break down each component:
Average daily usage
This is how many units of a product you sell or use per day on average. To calculate this, take your total units sold over the past 3-6 months and divide by the number of days in that period. Using a longer timeframe helps smooth out seasonal fluctuations.
Example: A coffee shop sells 240 bags of beans per month. That’s 240 ÷ 30 = 8 bags per day on average.
Lead time
Lead time is the number of days between when you place an order and when the stock actually arrives and is ready to use. This varies significantly by supplier and product type.
Examples of typical lead times:
- Local suppliers: 1-3 days
- Regional distributors: 3-7 days
- National wholesalers: 5-14 days
- International imports: 30-90+ days
Safety stock
Safety stock is extra inventory you keep on hand to buffer against unexpected demand spikes or supplier delays. Without it, a surge in sales or a delayed shipment could leave you out of stock.
Example calculation: If your coffee shop normally sells 8 bags daily but occasionally sees demand jump to 12 bags on busy days, you might maintain a safety stock of 20 bags (roughly 2-3 days of extra coverage).
Working through a complete example
Let’s apply this to a real business scenario. Imagine you run a small bookstore:
- Average daily sales: You sell 45 books per day
- Lead time from your distributor: 7 days
- Safety stock: You decide to keep 100 books as a buffer
Calculation: (45 books × 7 days) + 100 = 315 + 100 = 415 books
This means when your inventory reaches 415 books, it’s time to place a new order. By the time your shipment arrives 7 days later, you’ll have sold approximately 315 books, bringing you close to your safety stock level.
Calculating safety stock
For small businesses without sophisticated forecasting, a practical approach is to set safety stock at 10-20% of your average lead time demand:
Safety stock = (Average daily usage × Lead time) × 0.1 to 0.2
Using our bookstore example: (45 × 7) × 0.15 = 315 × 0.15 = 47 books
This means a safety stock of approximately 47 books would be reasonable, giving you about 1 day of extra buffer.
Product-specific considerations
Not all inventory deserves the same reorder approach. Consider your products’ characteristics:
- Fast-moving items (high turnover): Lower safety stock needed; you can reorder more frequently
- Seasonal products: Increase safety stock before peak seasons; reduce it afterward
- Perishable goods: Keep safety stock minimal to avoid spoilage; prioritize reliable suppliers with short lead times
- High-value items: You may accept lower safety stock to minimize tied-up capital
Reviewing and updating your reorder points
Revisit this number periodically rather than setting it once — both your demand and your supplier’s lead time can shift over time. A reorder point calculated a year ago may no longer reflect current reality.
Review your reorder points when:
- Seasonal patterns shift (quarterly review is ideal)
- You change suppliers or experience consistent delays
- Your sales volume increases or decreases significantly
- You’ve had stockout incidents or excessive overstock situations
- You launch new products or discontinue slow movers
Many accounting and inventory management tools (like Square, Shopify, or QuickBooks) can automate reorder point tracking and even alert you when you’re approaching the threshold. Even spreadsheet-based tracking beats manual monitoring.
Key takeaway
The right reorder point balances two competing costs: the cost of stockouts versus the cost of holding excess inventory. By calculating your reorder point systematically and updating it regularly, you’ll minimize both risks and free up cash for other business priorities.