Inventory Investment: Is It a Good Idea?
Inventory is the lifeblood of most businesses. Without sufficient inventory, businesses risk running out of products, losing profits, and even losing customers.
A well-managed inventory can minimize or even eliminate these potential losses. That is why it is so important to develop good practices for managing product stock.
A good way to prevent these problems and maintain profit is what is known as inventory investment.
If you own a retail business or another business reliant on keeping products and merchandise in a warehouse, you need to make sure you have enough stock on hand. If your inventory runs too low, your business can suffer incredibly.
However, tight cash flow can create situations where keeping inventory on hand is difficult or even impossible.
In this article, we will go over the basics of inventory investment, whether it is worthwhile for your business and the best ways to achieve a healthy inventory.
What Is Inventory Investment?
Inventory investment is often discussed in the context of countries’ gross domestic product (GDP). However, it also applies to individual businesses. Simply enough, it’s when a business decides to spend their money to buy inventory that it plans to sell later.
Many entrepreneurs choose to invest in their business inventory when they know a product has a high demand. This way, they ensure they always have enough product on hand and they don’t lose their customers to the competition.
Of course, the goal of all businesses is to eventually move all their inventory off the warehouse shelves to customers. Nevertheless, it is often the case that not all of a business’s products are sold. And having too much of a product that isn’t selling might mean losing money.
It is important to have a good balance, not buying too much, but not keeping too little, in order to profit from the inventory.
To be able to take good inventory decisions, it’s important to know what categories inventory can have. This will help you make better decisions about what products you should invest in.
Many businesses categorize inventory into three types:
1. Dead inventory
Dead inventory is a fairly self-explanatory term. It refers to the stock that customers do not buy, for whatever reason. That means it remains sitting in storage without ever bringing you a profit. In fact, it actually hurts your profits, since it is taking up money and taking space that could be used for other products.
Most estimates define dead inventory as the stock that has not moved off the shelves in the last six months.
Some businesses have a particular struggle with dead inventory because they know they will sell their stock eventually, but they certainly do not sell it frequently. That means that most of the time, it is sitting on their shelves and serving no purpose.
The usual solution to this is to save this kind of inventory for special orders that customers can put in as needed. That way, no time, space, or cash is wasted.
As for other inventory that meets the requirements for “dead,” try marking it down to see if you can incentivize customers to buy it on a quick sale. And if that does not work, your final and wisest option is to note it as unsellable in your inventory records. At this point, you can contact the distributor to see if they are interested in a return. If that is not possible, consider donating the item to charity as a tax write-off. With dead inventory, it is all about taking what you can get and avoiding the same mistake in the future.
2. Slow-moving inventory
Some inventory, meanwhile, cannot be classified as dead but does meet the criteria for being slow-moving. Slow-moving inventory can be hard to categorize and identify. Recessions and other criteria can turn normal inventory into slow inventory. This puts a damper on your business’s cash flow since inventory is sitting and transactions are idling.
As for your investors, they will look at slow-moving inventory and see a lower return on equity.
To really identify your slow-moving inventory, however, you will have to review not only your own stock but also that of other companies in your industry and market.
3. Product inventory
Productive inventory, meanwhile, is exactly what it sounds like: it is inventory that is moving off the shelves and making a profit, ensuring that cash flow remains reliable.
Even if your inventory is doing well, however, it is still a good idea to review it every now and then to know what you are doing right as well as what you are doing wrong.
There are many factors that can affect your inventory, especially business and external factors. Let’s learn more about them.
Business Factors to Consider
Your business’s inventory directly affects both your profit and cash flow.
Keeping too much inventory can mean products become obsolete or too old to sell.
On the other hand, keeping too little inventory creates the risk that your business runs out and loses profit or customers.
Either way, your business loses money.
Before starting any inventory investment, consider your business’s inventory needs. Also, look carefully over your projected inventory needs for the future.
Properly managing inventory makes your business more productive, cutting waste and growing profits.
External Factors to Consider
One major external factor to consider when thinking of investing in inventory is the state of the economy. It can be more difficult to project business inventory needs during a recession, for example. As well, it helps to have an idea if the economy is about to hit a high point.
While the health of the general economy is important, it pays to look at the health of your business’s sector too. The way your sector and the general economy are performing can have major impacts on your customer demand. Keep an eye on how your competitors are performing.
You also need to project customer demand as accurately as possible.
This means taking account of your recent financial history compared to the long-term and seeing the rate of change.
Without an accurate picture of future customer demand, it is impossible to predict your business inventory needs.
Pros of inventory investment
Inventory investment has a number of important pros that reward the extra effort and risk.
- It enables more efficient and predictable production, better-planned manufacturing, and steadier supply.
- It also helps build profits by cutting down on wasted product or lost sales.
- With proper business inventory management, the chances of running out of product or wasting excess are drastically reduced.
Cons of inventory investment
However, there are some cons you need to take into consideration.
- It requires more effort on your part. To effectively utilize it, you need to account for the factors previously mentioned above. You also need to predict your inventory needs and keep thorough records of performance, which might be complicated.
- Miscalculation can be a grave mistake. If you predict the wrong amount of inventory you need, you could easily end up with far too much or quickly running short. You could also end up needing more or less financing than you thought.
- Excess inventory can quickly become waste and shortages can swiftly lose customers. Good inventory management practices help prevent this. Ensure that you understand your business’s financial situation. If your business’s finances are unhealthy, it is probably not a good time for inventory financing.
What is inventory financing?
Inventory financing is a way to borrow money to purchase inventory, most often through a short-term loan.
Is inventory investment for you?
For many businesses, inventory investment is a powerful tool. Businesses that sell physical products tend to benefit the most, though even other businesses can benefit too.
Inventory financing can get the money your business needs for proper inventory investment. Short-term loans help businesses plan ahead every day.
At Camino Financial, we are fully committed to our motto, “No business left behind.” We design our financing options to be flexible, with options for entrepreneurs of all types.
We are committed to walking you through every step of inventory investment and helping you plan ahead.
Request a quote now and let us help you find out if inventory investment is right for your business.
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