What is an SKU? The Guide to Business Inventory Management

A Stock Keeping Unit (SKU) is the simplest way to organise products inside any inventory system. It tells your team exactly which item was sold, returned, transferred, or restocked.

Many Malaysian businesses run into trouble when they manage stock manually, especially when they add more outlets or sell online and offline at the same time. 

Enter SKU, the hero of inventory management.

Today, we will explain what an SKU is, how to create proper SKU codes, and why it matters for day to day operations across stores, storerooms, and delivery teams. So let’s begin.

What Is an SKU and How Does It Work?

An SKU is an internal product code that helps you identify and track specific items in your stock.

An SKU is not a barcode or a universal code. 

It is a code you create yourself so that your team can understand a product quickly. A single item (such as a shirt) often has multiple variations, for example:

• Colour
• Size
• Model

With SKUs, each variation receives its own code, so your system knows exactly what was sold.

An example:

A small fashion outlet in Puchong sells one shirt in six colours and four sizes. Once they created SKUs for colour and size, online orders matched store counts more accurately, and they avoided overselling during weekend promotions.

Why Do Businesses Need SKUs for Inventory Management?

SKUs create clarity in stock control, picking, restocking, and sales reporting.

Many businesses struggle when manual counts differ between the storeroom and the cashier system. SKUs help avoid these gaps by giving each product variation a clear identity.

Benefits seen in daily operations:

• Faster counting during monthly stock takes.
• Fewer mistakes when staff pick orders for delivery riders.
• Clear restocking numbers for suppliers.
• Accurate reports that separate which items are bestsellers.

Retailers with multiple branches across Malaysia often use SKUs to standardise stock updates among staff with different shifts. 

When everyone uses the same codes, data flows cleanly between outlets, and less disgruntled customers over “why no stock one?”

How Do You Create SKU Codes Step by Step?

We recommend using a repeatable pattern that includes category, brand, and product attributes.

Consistency is really important, because this helps employees to read SKUs without confusion. You can customise formats based on your product types but the simpler it is, the better.

Step 1. Start with the category

Use two to three letters that describe the product family.

Examples:

• SH for shirts
• BK for bakery
• EL for electronics

For e-commerce websites that sell multiple product categories, we do recommend this simple labelling.

Step 2. Add brand or series

This helps separate items when you stock multiple brands.

Examples:

• SH ABC
• EL XP3

Step 3. Include variation attributes

Colour, size, flavour, material, or model.

Examples:

• SH ABC BLK M
• BK CKE RED L

Step 4. Decide on a fixed pattern

Choose a pattern that will scale when you introduce more items later. For example:

[Category] [Brand or Series] [Colour] [Size or Model] [Batch or Year Code]

This creates a sequence that remains stable as your product range grows. It also helps new staff understand the rules quickly.

Sample formats using the pattern above:

SH ABC BLK M 25

• SH (Shirt category)
• ABC (Brand or series)
• BLK (Colour)
• M (Size)
• 25 (Year or batch reference)

Step 5. Record your SKU rules in a simple SOP

Keep a short one page reference so that staff in stores, warehouses, or packaging can follow the same method.

Clean SKU vs Messy SKU

Read more: How to Prepare a Cash Flow Statement: A Beginner’s Guide

What Is the Difference Between SKU and Barcode?

An SKU is your internal identifier for each product variation, it’s not the same as a barcode. 

A barcode is just a machine-readable label that carries data. For retail point-of-sale, that data is usually a GS1 Global Trade Item Number (GTIN) created by the brand owner using GS1 standards (in Malaysia, via GS1 Malaysia). 

Different barcode types exist but for the sake of simplicity, we shall not mention it.

Comparison Table

Many small retailers in the country rely only on barcodes, which makes internal reporting difficult. Once they add SKUs, monthly stock checks often become faster because teams know exactly what item the report refers to.

What Is the Difference Between SKU, Product Code, and Item Code?

These three terms sound similar, but they serve different roles inside a business.

Many business owners use them interchangeably, which often leads to confusion during stock counts or system setup.

SKU (Stock Keeping Unit)

Your internal code that identifies each variation of a product. Used for stock counts, picking, reporting, and online listings.

Product Code

Usually the manufacturer or supplier’s reference number. Good for purchasing, but not flexible enough for your internal tracking.

Item Code

A general label used by older POS systems or legacy spreadsheets. May refer to a product family rather than specific variations.

How Do SKUs Improve Multi Channel Selling?

They provide a single dashboard for all of your stock when you sell across branches or online platforms.

When your products are sold in a physical shop and through online Shopee channels, stock levels can drift apart if the system cannot identify product variations correctly.

Common issues SKUs solve:

• Variations with similar names (for example blue vs navy)
• Wrong items assigned to online listings
• Manual updates that do not match store counts
• Difficulty tracking bestselling colours or sizes

Here’s a scenario:

A homeware shop with a warehouse in Shah Alam and a retail shop in KL created clear SKUs for all colours and sizes. Within one month, returns decreased because staff picked the correct items during courier packing.

What Are Common SKU Mistakes to Avoid?

Avoid inconsistent formats, overly long codes, and supplier dependent codes.

Poor SKU planning leads to confusion when the product range expands.

Frequent errors:

• Mixing product names and random numbers
• Changing SKU formats halfway through the year
• Reusing SKUs for new items
• Letting suppliers decide your internal SKU codes
• Creating SKUs that are too long to read quickly

Since many SMEs hire new staff during peak seasons, clear SKUs make onboarding much easier because new team members can understand the stock system in minutes.

How Do SKUs Affect Accounting and Reporting?

A consistent SKU system keeps sales and cost tracking clean across outlets and channels.

SKUs help accounting teams understand which products generate the most revenue or require the most restocking. 

They also improve audit reports, especially when a company expands to multiple locations.

Useful for:

• Stock valuation
• Cost of goods sold accuracy
• Product level profit tracking
• Internal audits and year end reviews

When SKUs are clean, the accounting software receives accurate item level data, which strengthens financial reporting.

How Do You Fix a Messy SKU System?

If you already have inconsistent SKUs don’t fret just yet, there’s no need for a complete overhaul. You can clean them without disrupting daily sales.

Many businesses start with random item names, supplier numbers, or codes that do not scale. A simple cleanup plan helps your system run smoothly again.

Step 1. Identify Duplicates And Conflicts

Export your product list and highlight repeated codes or variations sharing the same SKU.

Step 2. Choose A New SKU Pattern

Keep it simple and readable. Use the pattern you created earlier based on category, brand, and variation.

Step 3. Update Items Gradually

Instead of changing everything in one day, update SKUs in small batches so staff can adapt.

Step 4. Update online listings, POS, and internal sheets

Make sure the new SKUs match across every channel to avoid confusion.

Step 5. Document the rules in a short SOP

New staff can follow the format easily, especially during peak periods.

Conclusion: What Is SKU in Business Inventory?

A stock keeping unit is your internal code for tracking product variations with precision. It keeps stock control clean, reduces packing and restocking errors, and improves reporting when your business expands across outlets or online channels. 

If you need help setting up a clean stock system that aligns with your accounting records, we can assist through our bookkeeping, audit preparation, and stock reporting services at Accounting.my. 

Our team can guide you on how SKUs flow into cost tracking, stock valuation, and monthly financial statements so your numbers remain accurate as your business grows.