Inventory Management Secrets: How Stock Levels Impact Your Bottom Line and Cash Flow

Inventory is essential to meet customer demand but can also be a heavy burden on your company’s finances. The average inventory holding period determines how much capital is tied up in stock at any given time.

Suppose your company has $33.8 million in cost of goods sold and an ending inventory of $8.45 million. This translates to an average holding period of about 13 weeks, meaning you have invested in inventory equivalent to 13 weeks of product costs.

Holding inventory too long ties up cash that could be used elsewhere, increasing borrowing needs and interest expenses. Conversely, holding too little risks stock-outs, lost sales, and unhappy customers.

Cost of goods sold (COGS) is recorded when inventory is sold, matching expense to revenue. Unsold inventory remains an asset until sold. This matching principle ensures accurate profit measurement.

Improving inventory turnover—reducing the holding period from 13 to 10 weeks—could free up nearly $2 million in cash. This cash can reduce debt or be reinvested in growth initiatives.

Effective inventory management requires coordination between purchasing, production, and sales. Monitoring industry benchmarks and using metrics like inventory turnover ratio helps maintain balance.

Next, we’ll explore how purchasing inventory on credit creates accounts payable and influences your cash flow cycle.