Lost & Found – Dollars Lost in Inventory

In this Lost & Found, we will look at optimizing your inventory turns to reduce the amount of inventory on hand. An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more. Increasing inventory turns is beneficial in three main ways:

  • Reduce your holding costs so you spend less money on rent, utilities, insurance, theft and other costs of maintaining a product. This reduction in overhead costs will improve net income.
  • Free cash trapped in excessive inventory by optimizing your on hand inventory.
  • Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing for the replacement of obsolete items.

There are many other ways to optimize your inventory besides increasing your turns. Fill in the blanks below to see how much your company can increase your profit by improving your inventory turns.

Variable

Example

Your Business

Annual Cost of Goods Sold

$1,500,000

$

Average Current Inventory Value

÷1,000,000

Current Inventory Turns

1.5

Annual Cost of Good Sold

$1,500,000

Anticipated Improved Turns

÷ 6

Anticipated New Inv. Value

$ 375,000

Average Current Inventory Value

$1,000,000

Anticipated New Inv. Value

375,000

Total Inventory Reduction*

$ 25,000*

*

Carrying Cost (10% industry average)

x .10

Improved Annual Profit

$ 62,500

_

* This is additional cash that will be liberated from your excess inventory!

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