Stock keeping units: Definition and how to create an SKU

Published Thursday 9 July 2026

Table of contents

• What is a stock keeping unit?
• Why SKUs matter for small businesses
• How a SKU works
• How to create an SKU system
• Difference between SKUs and UPCs and serial numbers
• Tips for managing SKUs
• Organise your SKUs with Xero
• FAQs on SKUs

Key takeaways

• An SKU is a unique internal code you assign to each product variant to track stock, sales, and reporting.
• Effective SKUs are short and readable, using uppercase letters and numbers while avoiding special characters and leading zeros.
• Build SKUs from meaningful attributes like brand, item, size, and colour, ordered from least to most specific.
• Test a new SKU system on a small set of products before rolling it out across all your sales channels.

What is a stock keeping unit?

A stock keeping unit (SKU) is a unique internal code a business assigns to each product variant to track and identify it across sales, inventory, and reporting. Whether you sell pencils or luxury handbags, you can track transactions, record inward receiving, and perform stocktakes by allocating these unique codes that identify each of your product variants. Stock keeping units are internal, and are effectively a naming language unique to your business to power your stock management.

Why SKUs matter for small businesses

Consistency is key when it comes to managing transactions or record keeping, so a unique SKU assigned to each product helps to make sure that products entering or leaving your system are identified the same way every time. Here are some of the key reasons that stock keeping units matter for small businesses:

• Keeps stocktake, receiving inventory, and sales accurate: SKUs create consistency and integrate with accounting software more easily. This simplifies real-time stock control where unique codes reduce confusion or incorrect product identification for sales, inventory tracking, stocktake, or tax records.
• Speeds up sales time: Instead of having to enter lengthy descriptions to look up particular stock items, such as “pants, black, extra small” can become simplified in this SKU example: PA-BLA-XS. Businesses can even just use a simple numerical code, and staff can look up items using pricing tags or labels that feature the SKU.
• Better integration with e-commerce: Online retail platforms may better integrate with your sales systems where standardised codes identify products, basically establishing a common language between your online sales portal and yourinternal product orinventory management. This also makes reconciliation of your online sales much simpler.
• Consistency over time: Establishing consistency in how you identify products can help to keep things in order when staff come and go, the business changes hands, or new products release or become discontinued. This helps to avoid mixing products up, track “dead” SKUs, or separate date-sensitive products, such as those with expiry dates or vintages.

How a SKU works

A stock keeping unit works essentially like a private codename you give the products in your inventory, in the form of a multi-part code that you create. When you enter new stock into your inventory system, you enter that number of items into the system under that code. Whether you’re looking at your stock items on a spreadsheet, POS (point of sale) system, inventory management platform, or accounting software, that SKU code follows the real stock item and represents it in your systems. With modern, intelligent systems, entering the SKU might even automatically populate invoices, purchase orders, or receipts with the full name or description of a product.

How to create an SKU system

Here are some simple steps you can follow to create new SKUs for your business:

Define key attributes

Firstly, create the skeleton of your SKU system by defining the key product attributes. For example, if you sell clothing the defining qualities that distinguish your products might be brand, type, size, or colour. If you sell food items, you may use attributes like department, brand, flavour, quantity or packaging size. You may also add a sequence identifier, typically to the end of the SKU to track the chronology in which you entered the product into your inventory.

Create shorthand codes for those attributes

The key to an effective stock keeping unit is brevity. Creating a memorable and straightforward code for each attribute helps to keep SKUs short, simple, and easy to print or write on labels, price tags, or stickers. You can aim to assign each attribute a code of only two-to-four letters. Here are some examples of how you can crunch longer descriptors into shorthand for different products:

Wine

• winery name-pinot noir-vintage-bottle size (ml)-case size-sequence: WN-PN-26-750-12-413

Clothing

• brand name-woolen jumper-pink-vintage look- extra large- sequence: BN-WJ-PNK-VL-XL-413

Order those attributes logically

Establishing a logical order is what allows yourself or your staff to look up items without knowing the SKU off by heart. If the order of your attributes isn’t intuitive, you may waste time trying different combinations, so creating rules around the order in which to list these attributes makes your SKUs more effective.

Try listing attributes in order of least-to-most specific. For example, starting with the brand name or producer and listing attributes that further narrow the item down with each segment is a simple rule for stock unit creation.

Assign SKUs in your system

Once you’ve created your new stock keeping unit, you can connect it to a barcode and list it in your inventory management system, or other business management processes. You can now categorise and track different types of inventory using the new SKUs you’ve created. In your accounting software, attach the SKU to an item code, connect sale price, purchase price, and GST rate and link it to the relevant chart of accounts.

Tips for creating functional SKUs

While you’re creating your stock keeping units, here are a few pointers that can help to keep them working effectively:

• Use consistent formatting. Keep your SKUs all upper case and alphanumerical, and avoid special characters
• Avoid using leading zeros. Starting a number segment with a zero can lead to complications in spreadsheets when importing data sets
• Use hyphens rather than spaces, commas or full stops. Using hyphens in your SKUs can also help avoid errors when dropping them into spreadsheets, search bars, or across different software
• Check that your SKU isn’t already being used. Before you put a new SKU into circulation, check in your system that no product already uses it

Difference between SKUs and UPCs and serial numbers

While SKUs, UPCs (unique product codes), and serial numbers are all related and serve similar purposes of uniquely identifying products, they each work slightly differently and are created by different parties at various stages of a product’s life cycle. SKUs are unique internal codes a business assigns to each product, but here’s how serial numbers and UPCs differ:

• Serial numbers: These are codes created by the manufacturer to identify a single unit. For example, every laptop a manufacturer produces has its own serial number assigned to that individual unit. For foodstuffs, a serial number may relate to a particular batch of a certain product.
• UPCs: These are 12-digit numerical codes created by GS1, the standards body for Australia and attached to the product by the manufacturer (usually printed on the packaging). UPCs come with an associated barcode, which allows products to be scanned and identified across the entire supply chain.

Note that UPCs (specifically “UPC-A” codes) are also predominantly used in the USA and Canada, but other common options of barcode exist for Australia, such as:

• EAN-13: European article number also common in New Zealand
• EAN-8: European article number, eight digits long, only for very small products
• ISBN: International standard book number, for identifying books
• ISSN: International standard serial number, for magazines

Tips for managing SKUs

Here are some tips you can use for effective SKU management every day:

• Deactivate old SKUs. If you know a SKU won’t be used anymore, deactivating it to take it out of circulation can help you streamline your stock management or sales processes. Don’t delete the SKU altogether, as you may need it for financial activity or to generate reports later on.
• Prepare a SKU creation guideline document. This is a guide you can use to standardise SKUs, record the rules in place, and ensure consistency across all of your stock keeping units. Creating such a guideline can help with shifts in responsibility, changing staff, or even as a handy reference to use over time.
• Evaluate and monitor your SKUs regularly. Test new SKUs on a small set before you roll them out across all channels and regularly monitor how well they’re working for your inventory management. If a SKU is regularly creating confusion or errors, reassess the code you’ve created, you may be able to create a new one and move stock over from the old code.

Organise your SKUs with Xero

Still need a hand keeping your SKUs in order? Xero helps you streamline automations, crunch hefty numbers, generate insightful product reports, and categorise products easily, while connecting your inventory to your financial management.

Ready to simplify managing those pesky stock keeping units? Get one month free

FAQs on SKUs

Here are some commonly asked questions and answers about SKUs:

How many characters should a SKU be?

Somewhere between eight and 12 characters is an SKU sweet-spot. A stock keeping unit can technically be as short or long as it needs to be, but too long and they could end up being laborious to use, with a greater margin for error. Too short, and your SKU could end up being oversimplified to the point of it being hard to intuitively tell which attribute a segment describes.

How do I find a SKU in my warehouse?

You find an SKU in your warehouse through your inventory management system or warehouse management system, which tracks stock locations against their SKUs. To make this more manageable, you can label storage areas with the associated SKUs you might find in a given section, aisle, or rack, which also makes stocktake faster.

What is the difference between SKU and unit?

An SKU is a “stock keeping unit”, which is the product code you create, while a “unit” usually refers to the item itself. Note that the word unit can also mean different things for different packaging arrangements. For example, you might consider a unit to be a case of cans, or a single can, so it’s helpful to set a consistent rule across your business.

How do I migrate to a new SKU system without breaking things?

Export a full list of current SKUs, map them to your new SKUs in a table, then update them across your sales channels and other systems, either manually or in bulk. It’s smart to complete a stocktake and reconcile your stock on hand before you migrate to maximise accuracy, and to archive your old SKUs for later reference.

Do I need barcodes if I have SKUs?

No, you don’t need barcodes to create or manage internal SKUs. Barcodes are necessary if you want your products to be scannable at the counter, so in most retail, wholesale, or e-commerce contexts, connecting barcodes with your SKUs improves efficiency, accuracy, and automation. SKUs alone are sufficient if you only sell directly from your own store to the customer.