Inventory and costing
Stock Keeping Unit (SKU)
A Stock Keeping Unit is a unique alphanumeric code assigned to a specific product variant to track inventory levels, sales and locations within a business.
What is Stock Keeping Unit?
A Stock Keeping Unit is a unique identifier you assign to every distinct item you sell. Unlike universal barcodes assigned by manufacturers, you create these codes internally to match your specific operations. If you sell a shirt in three colours and four sizes, you need twelve distinct codes to track exactly which variants are selling and which are sitting on your shelves. These codes form the foundation of your inventory management system. When a customer buys an item, the code tells your system exactly what to deduct from your stock. This prevents overselling and helps you identify your most profitable items. By structuring your codes logically, you and your staff can instantly recognise a product's characteristics, such as its brand, size, colour and storage location, simply by reading the alphanumeric string.
How SKU works
Creating a functional system requires a logical, consistent format that everyone in your business can understand. You start by identifying the most important attributes of your products, such as category, brand, colour and size. Next, you assign short alphanumeric abbreviations to each attribute. You then combine these abbreviations into a single string for each unique product variant. When new stock arrives, you record the quantities against these specific codes in your ledger or inventory software. As sales occur, the system automatically deducts the sold quantities from the corresponding codes. This continuous cycle gives you an accurate, real-time view of your stock levels. If you change your product lines, you simply create new codes following the same established structure to maintain consistency across your entire catalogue.
- Determine the key attributes that distinguish your products from one another.
- Assign short, standardised alphanumeric abbreviations to each product attribute.
- Combine the abbreviations to generate a unique code for every variant.
- Record all incoming goods against their specific identification codes.
- Deduct sold items from the corresponding codes to maintain accurate stock levels.
Why it matters for your business
Without a structured coding system, you cannot accurately track which specific product variants are driving your profits. You risk running out of popular sizes or colours while capital remains tied up in slow-moving stock. A logical system speeds up order fulfilment because your staff can locate items faster and pack orders with fewer errors. It also simplifies your regular stock takes, making discrepancies easier to spot and investigate. Paper & Pen tracks stock automatically, allowing you to monitor quantities for every code in real time. This visibility helps you make informed purchasing decisions and keeps your customers satisfied.
Questions
Common questions
What is the difference between a SKU and a UPC?
How long should my product codes be?
Can I reuse a code if I stop selling a product?
Related terms
- Inventory turnover Inventory turnover is a financial metric that measures how many times a business has sold and replaced its total stock of goods over a specific period, usually a year.
- Reorder point A reorder point is the specific inventory level at which a business must place a new purchase order to replenish stock before running out completely.
- Safety stock Safety stock is an extra quantity of inventory kept on hand to prevent stockouts caused by unexpected surges in customer demand or sudden delays from suppliers.
- FIFO First-In, First-Out is an inventory valuation method where the oldest purchased goods are recorded as sold first, leaving the most recently purchased items in your closing stock.
- Stock take A stock take is the physical verification of the quantities and condition of items held in an inventory room or warehouse at a specific point in time.
- Backorder A backorder is a customer request for a product that is currently out of stock but is expected to be replenished and delivered at a later date.