What is inventory investment?
Inventory investment is an integral part of your business' finances. This is because the amount of your small business's inventory investment, directly affects your profit, and cash flow. Most importantly, the management of your inventory, (for a business that sells products), is crucial to the success of your company. If you hold too much inventory on your shelves, or in your warehouse, you run the risk of getting stuck with inventory that you can't sell. If you hold too little inventory, then you are risking stock outs and loss of customer good will. Either problem can cost your business big money.
This leaves many business owners wondering how to best manage their investment in inventory, to maximize profits and cash flow, and minimize expenses? The answer is you have to categorize your inventory into dead inventory, slow-moving inventory, and productive inventory and then deal with it appropriately.
There is an 80/20 rule in business for different situations. In the case of inventory, it has been shown that you usually get about 80 percent of your sales, from 20 percent of your inventory. This means that inventory managers must be proactive, and work on their supply chain management. It can increase your sales if you properly manage your inventory. Here are some steps to get you started-
- Always invest in assets with a positive rate of return-This may sound simple, but
- it really isn't. This is because the money that you have invested in inventory has been invested at a negative rate of return! Because you don't know if you are to make any money on that investment or not, the longer it sits in your warehouse, or on your store shelves, the more money you lose. Because of this you should make sure to invest in inventory conservatively, and wisely.
- Don't accumulate excess inventory-One the most dangerous things, you can do as a small business owner, is accumulate too much inventory. This is especially important in an economy on the verge of emerging from recession; you should not be tempted to stock up on too much on the inventory you sell. You will want to stock up slowly, and track your sales, to see what is selling, and what is not.
- Work to get rid of inventory that is not performing-Inventory that has been sitting on your shelves and not selling is referred to as "dead inventory". There are definitions of "dead inventory" but the reality is that it is taking up valuable space and tying up your money. Instead of holding onto dead inventory on your shelves, you need to mark it down for quick sale. For dead inventory that doesn't sell, you can check with the distributor to see if they will take it back. You may have to strike a deal to try a new product they are pushing. If all else fails, donate it to charity. At least, you'll get a tax write-off.
- Take a close look at slow-moving inventory-There is a difference here, since slow-moving inventory is not dead inventory because it is moving, but it may be moving toward obsolescence. It can be difficult to identify slow-moving inventory. Environmental factors have to be taken into account when analyzing inventory movement. However, there is no getting around the fact that slow moving inventory ties up your cash in idle inventory. It creates a negative impact on both profitability and cash flow. If you have investors in your company, it also lowers their return on equity. Keep in mind that in order to determine if some of your inventory is really slow-moving, you may need to look at businesses like your own, particularly in the same industry. Once you have identified slow-moving inventory take the appropriate steps to get it moving again.