Inventory: Small Business Owners' Achilles Heel

What is it about inventory that so many small business owners love to build and horde?

It makes small business owners feel successful, it is like money in the bank too many, it makes them feel prosperous the more inventory they have. They beam with pride because it's all paid for.

It is like accumulated wealth. They never want to miss out on a sale so they stock deep and wide. God forbid they should not have what anyone wants on any particular day. It's as if that would be catastrophic, so they have a huge inventory.

I have good news, it is not catastrophic and frankly, it's a huge waste of valuable resources and returns little of value in the long run. It is time to lose the inventory and regain the cash.

Here are the obvious shortfalls of this issue:

1. Styles change, rendering some inventory worth less, lots less.

2. Technology changes, leaving some inventory worthless.

3. It costs money to own and hold inventory that could be used elsewhere far more profitably.

4. The longer you hold it the greater the shrinkage. I know not your employees.

5. Warehousing it costs additional money, as does heating it and all the other overhead associated with it.

6. Insuring it is expensive.

7. The capital tied up in the acquisition of the inventory is worth less everyday it sits.

But the biggest cost associated with large inventories is the huge amount of capital that cannot be used that is tied up in the acquisition of it. Wasted, unusable and decreasing in value daily. But you feel better having huge inventories so you do not lose a single sale.

It's silly, silly, and silly.

The goal better stated is to have the least amount of inventory possible and yes, it is ok to run out of a model and have to back order it even if you lose a sale. The cost of the additional inventory it requires to prevent a loss of a single sale is well beyond any profits that may be earned. It's a fool's paradise to believe that huge inventories create additional sales. Certainly not having the correct inventory may be a problem, but it is the excess we are talking about.

If your inventory is not turning 12 - 18 times per year you are over indulging. If you are not occasionally running out of stock, you have too much.

It is a fine line as to how much inventory to hold vs. how much business you are willing to lose, without it.

However, this is the line we must maintain, as little inventory as possible while losing some sales, as the balance point.

You would be amazed as to how much cash some of you have wrapped up in inventory that turns once or twice a year and you have five years of inventory on hand. No point.

Call your suppliers, if they can ship in two days then use their warehouse and let them hold the inventory. It works. Want deeper discounts to buy more? No, I would prefer to pay more and have less on hand. Do the math, it is not worth the extra investment and overhead costs.

Liquidate immediately, even at deep discounts, even at a loss, the cash you retain is far more valuable than the paper losses you experience, the cash will propel success in other important ways. Allowing it to remain locked up in non-productive inventory is a misuse of this most important resource... cash.