It’s no secret that your inventory investment can have a direct impact on your small business’s cash flow and profit. Having too much on hand could see you getting stuck with inventory that won’t sell, yet having too little can lead to shortages and unhappy customers. It’s a delicate balancing act that can be hard to get right all of the time.
However, a good inventory analysis can go a long way toward reaching optimal levels. We’re not just talking about counting inventory; it’s helpful to start placing it into categories like dead inventory, productive inventory, and slow-moving inventory and then take appropriate action with each group.
While slow-moving inventory isn’t technically dead, it could be headed for obsolescence in short order. It can lower your investors’ return on equity (if applicable), and it can also negatively impact your cash flow and profitability. If you use SKUs, take a look at each product and determine its inventory turnover. Setting a target inventory turnover and then taking action to clear out products that don’t meet it can be helpful.
Inventory that is collecting dust on your shelves is dead, and you shouldn’t let it sit there for a year before taking action. Stock that hasn’t sold in six months should be dealt with swiftly as it could be bringing your inventory turnover ratio down significantly. Mark it down to get it off your shelves, and if that doesn’t help, try to send it back to the distributor or donate it for a tax write-off. For dead inventory related to replacement parts for old products that customers need only occasionally, consider switching to special orders when those items are needed.
Productive inventory is your bread a butter, and this is what will see your cash flow and profits add up. Track this category closely to make sure it remains productive, and use the inventory turnover ratio to see just how well this inventory is performing.
By staying on top of inventory management, you can help your business stay profitable.
This blog post was based of an article from The Balance SMB. Read the full article here.