Inventory optimization is critical in 2026. Ecommerce brands face many challenges when it comes to inventory: tariffs, supply chain challenges, and rising holding costs.
Inventory-based businesses, like ecommerce, tend to be inventory-rich and cash-poor.
What can you do about that?
Let’s explore why inventory optimization is critical and why it is challenging. Here’s what we’ll cover:
- Why inventory optimization matters
- The challenges of inventory accounting
- Regular counts: The foundation of inventory optimization
- Damaged inventory: Stop margin erosion
- Lost inventory: Trust, but verify
- Marketing pulls: The hidden leak
- Returns: Optimize the reverse flow
- What this means for ecommerce operators
Why Inventory Optimization Matters
Inventory is the largest asset on most ecommerce balance sheets. When managed poorly, it becomes a liability.
Brands that fail to optimize inventory risk two extremes: overstocking, which traps cash and inflates carrying costs (inventory financing and storage), or understocking, which leads to lost sales or emergency purchases or air freighting at premium prices.
Over the last few years ecommerce has seen:
- Sales surges from COVID purchase spike
- Supply chain bottlenecks from sales surges
- Increases in the cost of inventory financing due to inflation
- Tariff chaos for imports into the United States.
All of these have resulted in higher cost of goods requiring hard decisions around pricing and order strategy.
Inventory optimization is the lever that protects margins and liquidity in this environment.
The Challenges of Inventory Accounting
Inventory optimization is a part of profit optimization. Good inventory optimization requires good inventory accounting. Good inventory accounting requires good inventory management.
Many of LedgerGurus’ peers in the industry have run away from providing robust inventory accounting services because so many ecommerce businesses are not doing good inventory management. I’m not talking small 6-figure brands. I’m talking 7-figure, and even high 8-figure brands.
There is so much that goes into inventory accounting. Read How to Optimize Your Inventory Accounting for Your Ecommerce Store and feel our pain.
Our pain is due to your pain in inventory management. Let’s explore some pain points with some anonymized war stories from years of working with ecommerce brands.
Regular Counts: The Foundation of Inventory Optimization
Why It Matters
Accurate stock counts are the backbone of inventory optimization. Without them, your cost of goods sold (COGS) and gross margin calculations are fiction. Counts uncover inventory management issues. When those issues build up, they can add up to real financial issues.
Inventory in the warehouse can deviate for several reasons which we will explore later in this article. For now, let’s tell a story where a lack of inventory counts resulted in an impact on the a sale of a business.
Story: Years of No Counts
LedgerGurus had a customer who was doing their own fulfillment for a massive number of products. They were a multi-decades old company who had started their online store long before Shopify, Facebook, and the modern ecommerce era.
For years, we had advised them to do a count so we could true up the value of inventory and COGS. Counts are painful and easy to ignore especially if you have a large warehouse with many SKUs, so it is understandable why they would want to pass.
Then they decided they wanted to sell the business. The new buyer was sophisticated and, as part of the diligence process, they required a count. The count revealed an inventory value that was hundreds of thousands of dollars off from what was on the books. That variance had built up over years but was required to be applied immediately. The result was a significant reduction in past 12 months profitability. As profit is often one of the key components of a business’s value, the potential cost was multipled.
Action Steps
- Implement regular cycle counting to true up inventory value to books.
- Learn from the counts and adjust processes to minimize variance.
Now, let’s learn why counts can deviate from value in the books.
Damaged Inventory: Stop Margin Erosion
Why It Matters
Damaged goods inflate inventory value and distort financial reporting. If you’re not tracking and adjusting for damage, your books will overstate assets and understate COGS. This can gradually creep the value of inventory over time until you do a count and true up the value.
Story: Damaged Goods
A few years ago, I bought an ecommerce brand, Sole Toscana, with two partners. We sell Italian Organic skincare. Every order has some issue with damaged boxes. Dropped box? Forklift missed the pallet and hit a box? Who knows why. The amount on the order gets reduced by damages every order. It isn’t a lot, but it adds up over time.
Action Steps
- Track damages tied to purchase orders.
- Add insurance if damages become significant.
- Apply adjustments with each order received to keep financials accurate.
Lost Inventory: Trust, But Verify
Why It Matters
3PLs and warehouses make mistakes. Even the biggest ecommerce business, Amazon, loses inventory regularly. For example, according to Getida’s article, Understanding Your Inventory Value, “Amazon sellers lose around 1% to 3% of their annual revenue to discrepancies.” How much of the 1-3% is lost inventory that isn’t broken out, but is still a component?
Story: Expired Inventory Found
Going back to Sole Toscana. We bought the company in 2022 including inventory in the warehouse. Months after we bought the business, we learned from our 3PL that some of said inventory had been misplaced, found, but it was now expired. Ouch, that was a costly discovery.
Warehouses aren’t perfect and regular counts can catch their errors.
Action Steps
- Do inventory counts regularly.
- Hold your 3PL or warehouse accountable for significant losses.
- Consider solutions like Getida for inventory refunds from Amazon FBA.
Marketing Pulls: The Hidden Leak
Why It Matters
Samples for influencers, giveaways, and photo shoots often bypass inventory systems. If you’re not accounting for these units, your inventory will be overstated and margins inflated.
No great story on this one. Just the reality that every ecommerce brand uses inventory with marketing. For some brands, this can be significant, as is the case with influencer marketing where free product is part of the equation.
Action Steps
- Treat marketing pulls like sales: create internal transfer orders.
- Assign a standard cost to every unit used for marketing.
- Review regularly to ensure marketing spend includes product costs.
Returns: Optimize the Reverse Flow
Why It Matters
Returns can either recover value or destroy it. Without clear processes, they distort COGS and cash flow.
Again, no great story here, just the reality that so many ecommerce businesses deal with returns. In some categories, such as apparel, returns are a huge challenge. According to a National Retail Federation Report, 2024 Consumer Returns in the Retail Industry, the average return rate in 2024 was 16.9% and noted that online return rates were higher.
The challenge with returns from a financial perspective is:
- Sale made, revenue recorded.
- Cost of Goods should also be recorded.
- Return is made and a refund is given, reducing revenue.
- Product comes back (sometimes it doesn’t) and doesn’t get recorded.
- Cost of sold product remains, despite the product coming back.
Sometimes, products can’t be resold, but in other cases the value of the product isn’t recaptured, causing Cost of Goods Sold to be duplicated, reducing profits on the books.
Action Steps
- Define return process: resale, refurbish, destroy.
- Automate inventory adjustments upon return receipt.
- Monitor return rates to inform policy.
What This Means for Ecommerce Operators
Inventory optimization isn’t about perfection – it’s about discipline. Here’s how to stay ahead:
- Invest in real-time systems: Spreadsheets are a liability. You really need an Inventory Management System.
- Document processes: Without Standard Operating Procedures, even the best software fails.
- Audit continuously: From 3PL reports to internal transfers, trust but verify.
In a challenging economic environment inventory optimization is the clearest lever you control. Brands that master these areas will preserve cash, protect margins, and position themselves for profitable growth.
Want an assessment of your inventory management? LedgerGurus’ Inventory Reality Check Diagnostic will assess the state of your inventory systems, what’s at risk, and provide an action plan.
