Inventory purchasing is deciding what stock to buy, from which supplier, how much, when and on what terms, then receiving and paying for it. It sets the cost of everything you sell, so a shilling saved here is a shilling of profit. Three numbers decide what a delivery really costs: the landed cost, the payment terms and the order size.
This guide covers the purchasing process, the main methods and the accounting, with one worked example in Ugandan shillings.
What is Inventory Purchasing?
Inventory purchasing is buying the goods a business sells, or the materials it makes them from, at the right quantity, time and price. It starts with a need, such as a low shelf or a season ahead. It ends when the goods are on the shelf, recorded and paid for.
It is narrower than procurement, which also covers buying equipment and services. When to buy and how many are covered in what is a reorder point and reorder quantity.
Why Inventory Purchasing Matters
Every shilling you pay a supplier comes back only when the goods sell. Buying well does four things:
- Prevents stockouts: best sellers are ordered before they run out, so you keep the sale.
- Avoids overstocking: slow lines are bought in small lots, so cash isn't stuck on shelves.
- Protects cash flow: payment dates match the weeks the goods sell, not earlier.
- Lowers the cost of every sale: better terms and lower transport per unit raise the margin on each item.
The Inventory Purchasing Process (Step-by-Step)
Six steps take a purchase from a need to stock you can sell. Step 5 is the one shops skip, and it is the most expensive to skip, because short deliveries get paid in full.
Step 1. Forecast demand
Start from what sold: the same weeks last year and the last eight weeks, adjusted for a season or school term ahead. How to avoid overstocking and stockouts turns sales into reorder levels.
Step 2. Check current inventory
List what you hold and what is already on order. A low-stock list by warehouse shows what has reached its reorder level.
Step 3. Decide what to reorder
Reorder what has reached its reorder level, in whole cartons, up to its maximum. Leave out lines that are slowing down, even when they are low.
Step 4. Create a purchase order (PO)
Send the supplier a written order with each item, quantity, agreed price, delivery date and payment terms. The PO is what you check the delivery and the invoice against.
Step 5. Receive and inspect stock
Count the delivery against the PO before you sign, and open a sample of cartons. Note short, wrong or damaged goods on the delivery note, so the supplier credits them.
Step 6. Update inventory records
Add the goods to stock the day they arrive, at their landed cost, and record the bill as owed to the supplier. Stock on the shelf but not in the records gets ordered twice.
For example: what one delivery really costs
For example, a shop in Mbarara orders 50 cartons of bar soap from a Kampala distributor at UGX 52,000 a carton. These are example figures, not a real supplier's prices.
| Line | UGX |
|---|---|
| Invoice: 50 cartons × 52,000 | 2,600,000 |
| Transport, Kampala to Mbarara | 150,000 |
| Loading and offloading | 20,000 |
| Landed cost | 2,770,000 |
| Landed cost per carton: 2,770,000 ÷ 50 | 55,400 |
The carton costs UGX 55,400 on the shelf, not UGX 52,000. Price from the landed cost, or the transport comes out of your margin unnoticed.
IFRS for SMEs counts the purchase price, import duties, transport and handling as the cost of stock, and deducts trade discounts (IFRS Foundation, Module 13, paragraph 13.6).
Is an early-payment discount worth borrowing for?
Usually, yes. Terms of 2/10 net 30 mean 2% off if you pay within 10 days, or the full amount by day 30 (Corporate Finance Institute).
Skipping the discount means paying 2% more to keep the money 20 extra days. That works out at 2 ÷ 98 × 365 ÷ 20 = 37.2% a year.
On the soap, the discount is UGX 52,000. Borrowing the UGX 2,548,000 for 20 days at Uganda's average lending rate of 17.32% costs about UGX 24,180 (Ministry of Finance, July 2026). The shop keeps about UGX 27,800 by borrowing to pay early.
Is a bulk discount worth the extra stock?
For a fast seller, usually yes, if the cash is free. Say the distributor offers 5% off for 100 cartons, and the shop sells 10 cartons a week.
- Saving: 5% of 100 × 52,000 is UGX 260,000, plus one delivery trip saved, UGX 170,000. Total: UGX 430,000.
- Extra holding cost: average stock rises by 25 cartons, UGX 1,385,000 at landed cost. At an example holding rate of 2% a month, over the 2.3 months the order lasts, that is about UGX 63,700.
- Cash: the order needs UGX 4,940,000 at once instead of UGX 2,600,000.
The bigger order comes out about UGX 366,300 ahead, if the shop can spare UGX 2,340,000 more for ten weeks. For goods that expire or go out of fashion, the answer can flip.
Common Inventory Purchasing Methods
Four methods decide how much and when you buy. Most shops use reorder points for most lines, and ABC analysis to decide where to spend their attention.
Economic Order Quantity (EOQ)
EOQ finds the order size at which ordering and holding costs together are lowest. It suits steady sellers; round its answer to whole cartons. Economic order quantity works the formula.
Just-in-Time (JIT)
JIT buys only what the next few days need, so little cash sits in stock. It needs a supplier who delivers on time, every time; with long or unreliable deliveries, keep a buffer instead.
Reorder Point System
A reorder point is the stock level that triggers an order: sales during the delivery time plus a safety buffer. It is the simplest method that works across a mixed shop.
ABC Analysis
ABC analysis ranks products by what they bring in: A items are the few that earn most, C items the many that earn little. Buy A items carefully and often, and C items in larger, rarer orders, as the 80/20 rule in inventory shows.
Key Systems to Support Inventory Purchasing
Five records keep purchasing honest. A system that shares them with the till saves typing them twice.
Inventory Management Software
Software that takes stock off at every sale shows what is low without a count. It should hold each product's cost, supplier and reorder level.
Supplier Performance Tracking
Score each delivery on three things: on time, complete, and at the agreed price. A supplier who gets 9 deliveries in 12 right forces you to carry extra buffer for the other 3.
Purchase Order (PO) System
Every order goes out as a numbered PO, and every delivery and invoice is matched to one. Unmatched invoices are where overcharges hide.
Real-Time Stock Tracking Tools
Stock that updates at the till, at receiving and at each transfer tells you what to buy today. Barcode scanning keeps it right at the speed of a busy counter.
Forecasting Tools
A spreadsheet of last year's sales by week is enough forecasting for most small shops. Inventory forecasting methods shows the formulas.
How to Account for Inventory Purchasing
Stock you buy is an asset until it sells; only then does its cost become an expense. Six rules keep the books right.
Record purchases in your books
A purchase on credit raises inventory and what you owe the supplier. The table follows the soap delivery and one carton's sale.
| Entry | Debit | Credit |
|---|---|---|
| Goods received on credit | Inventory 2,600,000 | Accounts payable 2,600,000 |
| Transport and loading paid in cash | Inventory 170,000 | Cash 170,000 |
| One carton sold for cash | Cash 70,000 | Sales 70,000 |
| The cost of that carton | Cost of goods sold 55,400 | Inventory 55,400 |
Track inventory through each stage
If you make what you sell, as a bakery or a tailor does, keep raw materials, work in progress and finished goods apart. Move the cost from one stage to the next as the goods are made.
Record Cost of Goods Sold (COGS)
When a product sells, move its cost from inventory to cost of goods sold, in the same period as the sale. The carton sold for UGX 70,000 cost UGX 55,400, a gross profit of UGX 14,600; see cost of goods sold.
Use a consistent cost method
Value stock with FIFO or weighted average cost, and keep the same method for similar goods. LIFO is not permitted under IFRS for SMEs (paragraph 13.18).
Follow accounting standards
Carry stock at the lower of cost and its estimated selling price less the costs to sell, not at "cost or market". Stock that has lost value is written down to that amount (IFRS for SMEs, paragraphs 13.4 and 13.19).
Use the inventory purchase formula
To find what you bought in a period from your stock figures:
Inventory purchases = ending inventory − beginning inventory + cost of goods sold
For example, a shop starts the month with UGX 18,000,000 of stock, sells goods that cost UGX 30,000,000, and ends with UGX 20,000,000. It bought 20,000,000 − 18,000,000 + 30,000,000 = UGX 32,000,000. If the supplier bills add up to more, look for deliveries never recorded, or stock lost since.
Best Practices for Smart Inventory Purchasing
Six habits keep purchasing costs down between negotiations.
Know your supplier's minimum order quantity (MOQ)
Ask each supplier for the smallest order, and the smallest mixed carton, they accept. For a slow line, a higher unit price on a small lot can cost less than holding a full carton for months.
Understand the cost of holding extra inventory
Holding cost = holding rate × inventory value ÷ 100, with the rate as a yearly percentage. Use your own rate, built from interest, rent, power and losses, as worked in inventory holding cost.
Track inventory levels in real time
Buy from a current low-stock list, not from a walk round the shelves. A list that updates at each sale shows what is low in every branch.
Monitor sales data and lead times
Record the date you order and the date the goods arrive, for every delivery. Plan with the longest delivery time you have seen in the past three months, not the supplier's promise.
Run regular inventory checks
Count a section every week and correct the records. A record that shows stock you don't have stops you reordering it until the shelf is empty.
Prepare for supply chain issues
Keep a second supplier for each best seller, and more buffer on goods that come through a port or across a border. When prices follow the exchange rate, buy ahead only on lines that sell fast.
How to buy and pay suppliers in ArmPOS
ArmPOS keeps orders, deliveries, payments and returns on the same records as the till.
- Add the supplier in People › Suppliers. Only the name is required (Record a purchase from a supplier).
- Reorder from the low-stock list. Reports › Product Quantity Alerts lists each product at or below its Stock Alert, by warehouse (Reports to check every day).
- Record the order as a purchase with status ordered. Stock doesn't change yet. When the goods arrive, edit it to received, and the stock is added to that warehouse.
- Add the extras. Shipping, Order Tax and Discount have their own boxes on the purchase.
- Buy by the carton, sell by the piece. Set the product's Purchase Unit to a carton built on the piece (Categories, brands and units).
- Import long delivery notes from a CSV of product codes and quantities (Import purchases).
- Pay in full or in part. Create Payment on the purchase records what you paid, and the rest stays due (Pay your suppliers).
- Send back what is wrong. A purchase return takes the goods out of stock and records what the supplier owes you (Return goods to a supplier).
- See what you owe. The Suppliers Report shows each supplier's purchases, payments and amount due (Customer and supplier reports).
On plans with Accounting, each purchase is booked automatically as inventory up and accounts payable up. See what ArmPOS includes for shops in Uganda.
Frequently asked questions
What is the difference between purchasing and procurement?
Purchasing is the buying itself: orders, receiving and paying. Procurement is wider, covering supplier choice, contracts and buying for the business's own use.
How do you calculate inventory purchases?
Inventory purchases = ending inventory − beginning inventory + cost of goods sold, for the same period. With UGX 18,000,000 at the start, UGX 30,000,000 sold at cost and UGX 20,000,000 at the end, purchases were UGX 32,000,000.
Should I take an early-payment discount?
Almost always, if you can pay. Skipping 2/10 net 30 costs about 37% a year, more than twice Uganda's average lending rate of 17.32%.
Are transport costs part of the cost of stock?
Yes. Transport, handling and import duties are part of the cost of purchase under IFRS for SMEs, so include them when you price the goods.
How often should a small shop place orders?
As often as the supplier delivers reliably and the order is worth the trip. Fast sellers from a nearby distributor can go weekly; slow lines can wait for a monthly order.
Price your next delivery at landed cost and check its payment terms before you sign. To keep purchases, payments and what you owe each supplier in one place, create a free ArmPOS account.
