What Is Safety Stock and Why Do You Need it for Your Business?

employee burnout represented by an employee stocking shelves

Being unable to supply a customer with what they want because you’re out of stock is every business owner’s nightmare, yet with ongoing global supply chain issues there’s a real risk of this happening more regularly.

You can avoid running out by carrying safety stock, so even if there are problems with your supply chain, you’re not letting customers down.

What is safety stock?

Carrying safety stock means you order more products than you need, so you’ve got a surplus and never run out. Think of it as a buffer in your business – you carry a little more inventory, but your customer is never disappointed, and your reputation doesn’t take a hit.

Supply chains are increasingly volatile in the wake of Covid lockdowns, high energy prices and the cost-of-living crisis and it’s simply not as easy to get what you want when you want it. Even if you practise good supply chain management, disruptions can occur, leaving you empty-handed and your customers disappointed if you’re not prepared.

It’s common in many industries to hold onto safety or buffer stock, to guard against shortages and cushion themselves against wildly fluctuating prices.

Why safety stock is important for a small business

If you run a small business, one of your pet peeves may be missed sales opportunities because of a stockout. And, if your customer can’t get what they want from you there’s a chance they’ll visit your competitor instead. Not only do you lose that sale but there’s a chance you’ll lose that customer for good too.

Carrying safety stock means you never miss a sale, and it can safeguard your business’s reputation too. If you operate in an industry where prices fluctuate a lot, carrying surplus stock can mitigate against those fluctuations – you can choose whether to accept them or keep your prices the same if you have plenty of product while a business short on stock has no choice but to pay the higher price.

How do you know how much safety stock you should carry?

The amount of inventory you should hold is a fine balancing act between meeting current demand and any future excess demand while not tying up too much of your cash in stock. While carrying stock is great for avoiding shortages, it does incur extra costs – you use the money you could be investing elsewhere and making interest income on, and there are extra costs involved in storing the stock, for example, renting a bigger warehouse space. For certain industries, the shelf life will also be a limiting factor.

Safety stock formula

There are a range of safety stock formulas on the internet but this one is a favourite and will give you a good idea of how much buffer stock you should hold:

(Maximum sales – average sales) x lead time

You can use the sales data from your Square POS system to calculate this. Your average sales are the average amount of sales over a period of time, say one month, and what you expect to sell on a normal day. Your maximum sales will be the most you’ve recorded over that same period.

The lead time will depend on the kind of business you’re in. If you’re in manufacturing, it will be the time taken to produce a new product. If you run a restaurant, it will likely be how frequently you restock i.e., take a trip to the wholesaler, or receive ingredients deliveries.

Fixed safety stock

If the idea of using a safety stock formula leaves you cold, there’s a simpler way many small retailers and restaurants keep on top of it: simply by using two stock figures – your daily stock level and a level in reserve. For example, if you sell boxes of Belgian chocolates or luxury hair conditioning treatments you could have six as your daily stock on the shelves, then always have another case of six in your stock room – as soon as you have to use the reserve case you order more.

If you get into good habits managing your inventory you can confidently take care of your stock and significantly reduce the risk of ever running out.

When to use safety stock

Like any business tactic, it’s about how you use it. Safety stock won’t really apply to low-selling items but if your popular products run out it can cause a significant drop in revenue and reputational damage. This is particularly important if you’re known for a signature dish or an exclusive product.

Safety stock simply gives you peace of mind.

Keeping inventory up to date with Square POS system and inventory management

One of the best ways to keep on top of stock levels is to use an inventory management system. Square POS has built-in inventory features which allow you to see at a glance what’s popular as well as stock levels. You can download inventory reports and receive daily email alerts when stock runs low or runs out.

Thorough inventory management is an effective way to avoid a stockout.