If you need to cancel an order after you have already confirmed it, you can use the cancel order button on the bottom of the order details page. You can provide a reason for cancellation that will be emailed to the buyer along with a notification of the cancellation.
If you are canceling the order because the item(s) ordered are now out of stock, just click cancel and those items will NOT be added back in to your inventory levels. If you do have the items but just can't make the delivery, click cancel and restock so those items are made available to other buyers.
To get to the order details page, find it by clicking on the Orders link in the navigation header and clicking on the order number that you want to edit.