For an SME, minimum stock (or alert stock) is a vital indicator. It lets you continue selling and delivering without interruption, while avoiding tying up cash in dormant products.

Too much stock leads to blocked cash flow, a risk of obsolescence, and additional logistics costs. But too little stock, and you risk stock-outs, loss of sales, unhappy customers.

In a perfect world, you would always maintain the minimum viable stock to be able to sell as much and as quickly as you can, without ever tying up resources. Easier said than done, of course. 

The aim of this guide is to help you understand, calculate and optimize your minimum stock levels according to your business, your supplier lead times and your cash flow.

What is minimum stock?

Minimum stock describes the least amount of inventory you need to be able to run your business at its maximum efficiency. Go below this level, and you’ll miss out on sales. Your delivery time becomes too long, and customers start going elsewhere. 

While your goal may be to maintain stock levels as close as practicable to this threshold, it’s a limit, not a target. You absolutely shouldn’t try to stay right on this borderline, because the risk if you fall under it is real. 

Minimum stock or alert stock: are they the same thing?

In practice, the two terms often mean the same thing: the stock level at which you need to trigger an order to avoid a shortage. But technically, a distinction is sometimes made between :

• Minimum stock: the stock level below which you must not fall
• Alert stock: Level at which you trigger an order to avoid reaching this minimum threshold

In practical terms, we use ‘alert stock’ to refer to the order signal, and ‘minimum stock’ as the absolute safety threshold. But the two are very often confused.

Why it's important to calculate it correctly

A well-defined minimum stock lets you:

• Order on time, without stress or stock-outs
• Maintain a good stock turnover rate
• Minimize unsold goods and overstocks
• Free up cash to finance your development

By knowing your minimum stock, you can then set your alert stock levels above this threshold. And depending on your industry and appetite for risk, you may choose to set a significant buffer.

Retail example: an SME selling small electrical appliances identifies that its kettles have a lead time of 12 days. By calculating the alert stock, it avoids 5 stock-outs in 2 months during the back-to-school period.

Industry example: a manufacturer of agricultural equipment configures its minimum stock on critical parts (sensors, specific screws) to be able to produce without interruption, even in the event of a supplier delay.

How to calculate your minimum stock (formula)

The simple formula:

Alert stock = Average daily consumption × Replenishment lead time + Safety stock

Explanation of the elements:

• Average daily consumption: average number of units sold or used per day
• Replenishment lead time: number of days between order and receipt
• Safety stock: safety margin to deal with unforeseen events (delays, peaks in demand)

Here’s a more concrete example. Suppose an office supplies retailer sells on average 30 units of pens per day:

• Supplier delivery time: 5 days
• Safety stock: 50 units pens
• Alert stock = 30×5+50 = 200 units of pens

When stock falls to 200, an order is automatically triggered.

Adapt alert stocks to your activity

This theoretical calculation is just a starting point. It needs to be adjusted to the reality on the ground:

a) Your sector

• Food industry: short lead times, perishable products. This requires low minimum stock levels but you must be very responsive.
  
  
• Construction/industry: heavy products, long lead times, suppliers abroad. You probably need higher safety stock levels.
  
  
• Retail / e-commerce: high seasonality, need for logistical anticipation. Adjust your alert stock depending on the period.

Example (fashion e-commerce): an online women's clothing shop increases its alert stock on its best-sellers in November to secure Christmas sales. In January, it reduces it sharply to avoid unsold stock.

b) Depending on the criticality of the products

Not all your products are of equal value to your business. If certain items run out—and you have to go a period without selling them—it may not have a profound impact on the business.

• For flagship products: higher minimum stock levels.
  
  
• For slow-moving or lower-value items: order on demand or very low stock levels.

Repair shop example: a garage keeps a high minimum stock of winter tyres from November to February, but none for the rest of the year. It can always order them in if requested by the rare customer who needs them. 

c) Depending on your financial capacity

An emergency stockpile has to be financed. And that's often where the problem lies: you know what to order, but you can't finance it in time.

You may not be able to order as early as you’d like. You may also not have the storage space (or the cash to pay for storage) to keep much on hand. 

How cash flow relates to minimum stock levels

Optimizing inventory has a direct impact on your cash flow. And cash flow directly impacts stocks in return. Maintaining an effective emergency stock means being able to:

• Order at the right time (and not only once you’ve been paid)
• Seize supplier opportunities (like early payment discounts or exclusive product lines)
• Deal with unforeseen events without halting your deliveries

Industrial example: a metal parts manufacturing company identifies that one of its Chinese suppliers is doubling delivery times because of the New Year. It wants to anticipate an order. Problem: its cash flow is too tight. As a result, it had to turn down two customer orders due to a lack of available raw materials.

How to optimize alert or minimum stock levels

Here are four simple steps to manage your alert stock processes better. 

1. Measure your consumption accurately

To correctly predict when you’ll need to make new orders, you need to know how quickly you go through existing supply. 

• Track your daily sales and consumption history closely 
• Watch out for occasional peaks, and remove these from your averages

This is fairly simple advice. But even simple steps can eat into precious time and effort. 

2. Clarify your actual delivery times

Once your alert sounds and you make an order, it obviously won’t just arrive overnight. And because different suppliers have different delivery times, your alert level will be different for each piece of inventory. 

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You should also factor in: 

• If this is typically a reputable supplier with whom you have a strong relationship. 
• Whether supplies need to travel internationally, with the usual customs checks and border controls.
• Slow deliveries during peak periods, or if there could be extenuating circumstances (public holidays, strikes, or supply chain issues).

There’s always an element of trust, but thinking ahead can really help. 

3. Calculate and adjust your safety stock

Use the calculation above, but also consider: 

• Your own history of stock-outs
• Your suppliers’ abilities (and willingness) to make exceptions or go the extra mile
• Customers’ appetite to wait longer or find other means of delivery

4. Automate alerts

Once you’ve calculated your alert stock levels and settled on your approach, you should hopefully be able to automate much of the monitoring and day-to-day effort. An ERP, a management tool, or a simple threshold in your checkout system should help you keep track of inventory levels.

These tools, while an extra cost, save serious hours every week. And they should prevent any major stock issues from ever occurring. 

What if you can't order in time?

Even with perfect calculations, the question remains: do you have the funds at hand to order when you need to?

If your cash flow is too tight, you risk:

• Delaying the order and receiving it too late
• Splitting your purchases (and losing bulk deals)
• Providing a lesser experience for customers
• Simply being unable to sell

This is where short-term financing becomes an invaluable tool. It's not about putting your company into debt, but about making your purchasing cycle more fluid.

Need quick cash to keep your business running?

At Defacto, we help SMBs finance their supplier invoices easily and quickly. If you’re caught short next time an alert stock triggers, see how much you could borrow here, in seconds.

Get the right minimum stock level to avoid surprises

A well-calculated alert stock means less stress, fewer stock-outs, and better control of cash flow for SMBs. But it's not just a question of formulas. 

It's also a matter of smart cash management, coordination with suppliers, and sometimes short-term financing to make sure you don't miss the right moment.