Small Inventoy | Big Benefits

In a previous blog, 3 Low Cost Sources of Cash – Part 1, the benefit a smaller inventory balance as a ready source of internal financing was discussed.  While I will not revisit that particular benefit, it is important to keep in mind that maintaining inventory levels that are not excessive offers several additional benefits as well.

Taking Physical Inventory

If you’ve ever been involved in taking a physical inventory, you certainly know what a hassle it can be.  Plus, the more you have to count the more potential problems you introduce.  First, it simply takes more time to count, and, as you know, time is money, especially since you are paying employees to count, record, reconcile, and make any needed adjustments.  Two, the larger the inventory you have the greater the likelihood of counting mistakes.

Shrinkage and Obsolescence

The more you have in inventory, the greater the possibility you have for theft, damage, or misplacement.  Related to shrinkage is obsolescence, which in a sense is really a form of shrinkage.  When the inventory you carry can no longer be sold at a profitable price, you end up writing down the value of the inventory and eventually making a decision on how to liquidate what has become unusable in the normal course of business.

Storage Costs

Let’s face it – inventory has to be kept somewhere.  It may even require a third party warehouse.  While some companies are required to keep larger quantities because of how they order product (such as order quantities required by an overseas manufacturer), this is generally not the case.  So, you end up not only having the carrying cost of the inventory, you may find yourself paying additional rent as well.  Not only does it require more space, but it is by nature difficult to keep excessive inventory neatly stored.  This is somewhat like that closet we all have at home where we throw everything we can’t bring ourselves to throw away.  It is inherently messy and invariably leads to holding on to things we will never use and using space we can’t spare.

Duplication

You may have a wonderful inventory tracking system, but the reality is that excessive inventory makes it more likely that you cannot locate what you need, when you need it, and, as a result, you end up ordering something you already have..

Your CPA Firm

Larger inventory levels means more time for an outside CPA firm to audit or review your company, producing additional expense.  Plus, you will find that CPA firms are notorious for getting concerned about large inventory levels with lower turnover rates, thus slowing down the review or audit process.

So, be encouraged to take a look at your inventory levels and mix and see where you can make improvements to reap multiple benefits.  Should you like to know more, contact us at:  AimCFO – Contact

As always, your comments are welcomed.

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2 Responses to “Small Inventoy | Big Benefits”

  • Chris S - Your Small Business CFO:

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