Units to order each quarter equal expected sales plus target ending stock, minus the stock you have on hand. Someone in your shop makes that decision every quarter, whether it is the owner with a notebook, a manager with a spreadsheet, or a buyer who has done it the same way for years. When the decision goes wrong, it usually goes wrong in one of two ways: you run out of a product customers want, or you pay for boxes that sit on a shelf for months.
Key takeaways
- Estimate expected sales for each product, starting from last quarter but checking what has changed.
- Set each product's target ending stock from supplier reliability, delivery time, and the cost of holding stock.
- Count units, not cases, at the same point in each cycle, and have a second person check large counts.
- Resolve differences between counts and records before you calculate the order.
- Write down each quarter's plan and actual result, then compare them before the next order.
Each of those three inputs can be measured or estimated with tools you already have. This post explains each one, shows how they combine, and walks through a worked example from a managerial accounting textbook so you can see the arithmetic before you apply it to your own products.
The basic idea: sales plus what you keep, minus what you have
The logic behind the formula is straightforward. During a quarter you need enough units to cover the sales you expect, plus a cushion you want still in stock when the quarter ends. Whatever you already have reduces that total, and the remainder is what you must order or produce.
OpenStax's managerial accounting text describes this logic for a manufacturer's operating budget, where production is planned from sales estimates and inventory targets. You can read the section here: OpenStax, 7.2 Prepare Operating Budgets.
Each piece of the formula maps to one input: expected sales, target ending stock, and stock on hand. If any one of them is wrong, your order will be wrong by the same amount. The rest of this post takes them in that order.
Input 1: expected sales for the coming quarter
Expected sales is the number of units you think customers will buy during the quarter you are ordering for. It is the biggest input, and it is the one most people estimate badly, because they look at what sold last quarter and assume the same thing will happen again.
Last quarter is a starting point, not a forecast. Ask whether anything is different this time. Did a holiday fall in a different place on the calendar? Did a competitor close, or open nearby? Did you change prices, start advertising, or add a product line?
You can see the approach in OpenStax, 7.2. That is a deliberate forecast, written down with a figure for each quarter.
For a small shop, you do not need a sophisticated model. You do need a written number for each quarter, a short note on why you chose it, and a habit of comparing it against what actually sold. If you expected one figure and sold noticeably fewer, that gap is information. For a step-by-step way to check that gap, see Predicted and actual usage: 7 steps to check gaps. Note which products missed and by how much, then adjust the next quarter.
Two habits help here. First, estimate by product rather than by department or category, because each ordering decision is made for a specific item. Second, keep the estimate for the quarter you are ordering for separate from the estimate for the quarter after it. The later quarter drives your ending stock target, so mixing them up will throw off the order.
Input 2: the stock you want on hand at quarter end
Target ending stock is the number of units you want left when the quarter closes. It is your safety margin against a busy first week of the next quarter, a late delivery, or a supplier who needs more notice than you expected.
Many businesses set this as a percentage of the next quarter's expected sales, so the target rises when the next quarter is busier and falls when it is quieter. The OpenStax example uses this method. For new products, the textbook's company requires a target ending inventory of 30% of the next quarter's sales. In a simplified version of that arithmetic, expected sales in quarter 2 are 1,000 units, so 30% of 1,000 is 300, and the ending inventory for quarter 1 needs to be 300 units. The full worked example later in this post uses different figures. Source: OpenStax, 7.2.
Be clear about what that 30% is. It is one company's policy in one example, set for new products. It is not a universal rule, and it is not a recommendation for your shop. Your own percentage should reflect how reliably your supplier delivers, how long a delivery takes, how much a stockout costs you, and how much holding stock costs you in money and space. A product you can reorder quickly needs a smaller margin than one that takes a long time to arrive from overseas. A product that is cheap and easy to store can carry a bigger margin than a bulky, expensive one.
The formula also means the ending stock target depends on next quarter's sales. You cannot finish this quarter's order until you have an estimate for next quarter, so build the forecast at least two quarters ahead before you place orders.
Input 3: what you already have on hand
The third input is the stock on hand figure. It gets subtracted, because units already on the shelf or in the warehouse reduce what you need to order.
This input is only as good as the count behind it. If the count is wrong, the order is wrong, and you may not notice until you are either out of stock or overloaded. This is where the staff who count stock matter most. A rushed count sheet, a shelf that was not checked, or a stockroom with items in two locations can all push the number too high or too low.
Some practical points for counting:
- Count at the same point in each cycle, such as the last working day before the quarter closes, so the number means the same thing every time.
- Count units, not cases, unless the case size is written on the sheet beside the count. Counting a full case as one unit is a common and costly error.
- Count stock that is on hand and usable. Damaged, expired, or quarantined stock should be recorded separately, because it is physically present but does not meet demand.
- Count stock in transit only if your records treat it as received and available. Otherwise it can be counted twice, once when ordered and again when it arrives.
- Have a second person check any count that feeds a large order.
Discrepancies will happen. Frappe's ERPNext manual asks a question many shop owners will recognize: why a stock reconciliation can show a wrong difference amount or fail to match the accounts ( Frappe documentation). A mismatch like that is a signal to check the count before you trust the order. For the count steps, see Physical inventory reconciliation: 5 count steps. When the count disagrees with the system, do not simply overwrite the system with the count and move on. Find out why they differ. Theft, miscounting, unrecorded returns, and transfers between locations each leave different traces, and the fix depends on which one it is.
Who owns each input
Shops often struggle with this process not because the math is hard but because nobody clearly owns each number. Assign owners explicitly.
The manager or owner usually owns the sales forecast, since that person knows about promotions, seasonal patterns, and changes in the market. The buyer or the person who places orders usually owns the target ending stock setting for each product group, since that person knows supplier lead times and what happens when a product runs out. The counting team owns the stock on hand figure, and they should be able to say how each count was done.
One person should sign off on the final order. That person does not have to do every calculation, but they should be able to see all three inputs next to the result. When an order looks wrong, the sign-off step is where someone asks which input to check first.
A worked example, step by step
The OpenStax example is useful because it runs the three inputs together across several quarters. The numbers belong to the example company, not to your shop, so use them to learn the method rather than as targets.
Start with the first quarter of the next year. Marketing estimates sales of 3,500 units for that quarter and 4,500 for the quarter after. The company's target ending inventory for the first quarter is 30% of the second quarter's sales. Thirty percent of 4,500 is 1,350, so the company wants 1,350 units left at the end of that first quarter.
Next, the beginning inventory. The company expects to start the quarter with 1,050 units, and the source shows where that comes from. Thirty percent of 3,500 is 1,050, which is the required ending inventory for the quarter before. The full figures are in OpenStax, 7.2.
Now put the inputs into the formula. Sales of 3,500 plus ending inventory of 1,350 gives 4,850 units needed during the quarter. Subtract the 1,050 on hand, and the result is 3,800 units that must be produced or ordered. The textbook arrives at the same answer.
Notice how the inputs depend on each other. The beginning inventory for one quarter is simply the ending inventory target from the quarter before, so the chain runs forward. The same pattern carries into the following quarter, where the required ending inventory is again a share of the next quarter's sales. That is why ordering decisions are best made with a forecast spanning several quarters, not one quarter at a time.
Work through the chain yourself with your own numbers before you trust it. Write each quarter's sales, target, beginning stock, and order on one line. If the beginning stock on one line does not match the ending target on the line above, you have found an error before it reached a purchase order.
Starting from zero
Some products have no history. Maybe you are launching a new line, or you have just taken on a product you have never stocked. In that case your beginning stock is zero, and the formula still works. Everything you need in the first quarter has to be ordered.
The OpenStax example includes this situation. Its company could not manufacture any units before the end of the current year, so the first quarter's beginning inventory is zero units. See OpenStax, 7.2 for the setup.
For a new product, the first order covers the full quarter's expected sales plus the target ending stock, with nothing subtracted. It also means your sales estimate carries more weight, because you have no past quarters to check it against. Be careful in that first quarter. Order enough to avoid a stockout, but do not treat the first estimate as settled. Count closely at the end of the quarter, compare the result with the estimate, and adjust.
Illustrative example: a new product with round numbers
This example uses invented round numbers. Suppose a new product has expected sales of 1,000 units next quarter, a target ending stock of 300 units (30% of expected sales, chosen for this example only), and no stock on hand. Units to order equal 1,000 plus 300 minus 0, which is 1,300. At quarter end, count the units left. If the count is 300, the target was met. If it is lower, check both the sales estimate and the count before you change the percentage.
Putting it into a quarterly routine
A good method is only useful if it runs every quarter. Here is a routine that fits a small shop with a few people involved:
- Before the quarter closes, the manager confirms expected sales for the next quarter, product by product, and writes them down.
- Set or confirm the ending stock percentage for each product group. Keep a short list of the reasons for each setting.
- Near the end of the quarter, the counting team completes counts using the rules above. A second person checks any large item.
- Reconcile counts against your records. Resolve differences before calculating the order.
- Calculate units to order with the formula, rounding to whole units and to the pack or case size your supplier uses.
- Review the order against budget, storage space, and supplier lead times. Adjust if needed, and record the reason for any change.
- After the quarter, compare actual sales and ending stock against the plan. Write down what missed and why.
For a checklist to run before you place the order, see Shop replenishment: 7 checks before you order.
The last step is the one most shops skip, and it is where the method improves. Over several quarters, the gap between estimates and results shows which products are easy to forecast and which need more margin.
Rounding deserves a word of its own. The formula can give you a fraction of a case. Microsoft's documentation for the WorksheetFunction.Round method states that if num_digits is 0, the number is rounded to the nearest integer ( Microsoft Learn). Your order rounding is a business rule, not just a math setting. Decide in advance whether you round up to the next case, round to the nearest case, or always round down, and apply that rule the same way every time. Round in a way that matches how your supplier sells, not in a way that only looks neat on paper.
When the numbers miss
Every quarter will miss somewhere. The question is what the miss tells you. Sort each miss into one of three groups before changing anything.
If you ended with too much stock, check the sales estimate first. Did you expect a rise that did not come? If the forecast was reasonable, the ending stock percentage may be too high for that product, especially if the supplier has become more reliable.
If you ran out, check the count first. A count that was too high will make the order look smaller than it should be, and the shelf will be empty before anyone expected. Then check the forecast and the supplier's lead time.
If the miss was small and random, leave the settings alone. Changing numbers after every quarter based on one result is a fast way to lose track of what works. Look for a pattern over two or three quarters before you change a percentage.
Write down the cause and the change in the same place as the order. Over time that record becomes the most useful document in the stockroom, because it shows how your shop actually behaves, not how you remember it.
Common mistakes to avoid
A few errors show up again and again:
- Using last quarter's sales as this quarter's forecast without checking for changes.
- Setting one ending stock percentage for everything, even when lead times and costs vary widely.
- Counting cases as units, or units as cases.
- Forgetting that the ending stock target for one quarter is the beginning stock for the next.
- Ordering without subtracting stock on hand, which double counts units you already have.
- Skipping the review at quarter end, so the same mistake repeats next time.
Your next step today
Pick one product you reorder often and write its three inputs on one line: expected sales, target ending stock, and stock on hand. Then calculate that product's units to order using the formula in this post, and check the result against your supplier's pack or case size.
Frequently asked questions
Can last quarter's sales serve as the forecast?
Not on their own. Last quarter is a starting point, so check what has changed, such as holidays, competitors, prices, or advertising, before you use it.
What target ending stock percentage should I use?
There is no universal figure. The 30% in the OpenStax example is one company's policy for new products, so set your own based on supplier reliability, delivery time, and the cost of holding stock.
What if my stock count does not match my records?
Find out why before you trust the order.