Is your inventory an asset or a liability?
Your inventory is likely your primary source of revenue, so logically, you’d consider it your greatest asset. But, at the same time, it can be your greatest expense. How much of your inventory is sitting on the shelf collecting dust? How much of your inventory winds up on the sales rack? If your inventory turnover is particularly low, your inventory is not an asset.
Unsold inventory occurs for a number of reasons. It may not be a result of poor purchasing decisions (though pink sweaters and Bolo ties are never a good idea). Many times organizations just buy too much of something. On average, companies are holding on to 40% more inventory than they need. No matter how big or small your operation is, that’s a lot of money. That doesn’t sound too bad. After all, your inventory will get sold eventually. No harm, no foul, right?
The problem is, when you tie your capital up into a high amount of inventory, other aspects of your business will suffer.
Consider customer service and satisfaction. A large amount of inventory reduces the ability to satisfy customers because you won’t be able to afford re-stocking what is selling because they have too much of what is not selling.
So what’s the solution? It comes down to two major things – better inventory purchasing and better inventory pricing.
First, making smarter forecasts and inventory purchasing decisions. That’s easier said than done. Even the most effective successful retailers struggle with this. Go to any clothing website – there’s always plenty XXL shirts. But, if you have a better grasp of what sells fastest, and when it sells, this allows you to lower your amount of inventory, and empower your purchasing decisions.
Second, is to price items more accordingly to what the customers expect. If your inventory turnover for some items are noticeably low, it could simply be that the price is much higher than it should have been. Markdowns may not be your ideal solution, but the longer your item sits on the shelf, the less likely it will be purchased. Marking down items should be based on how long the items been in stock, how much is in stock, and how fast (or slow) items are flying off the shelf. Ultimately, this problem can be largely avoided by making sure that your valuation of items is as accurate as possible.
So, is your inventory an asset or a liability? It should be your greatest financial asset. If you are selling items that consumers can’t find elsewhere, and at the right price, your inventory turnover should be through the roof. If not, it may be time to get a better handle on your inventory.