Growth Strategies

Inventory and Cash Flow

How you handle inventory can have a major effect on your cash flow.
2 min read
Opinions expressed by Entrepreneur contributors are their own.

Cash flow problems are some of the most common difficulties small businesses encounter, and they are usually the first signs of serious financial trouble ahead. Tying money up in inventory can severely damage a small company's cash flow.

To control inventory effectively, prioritize your inventory needs. It might seem at first glance that the most expensive items in your inventory should receive the most attention. But in reality, less expensive items with higher turnover ratios have a greater effect on your business than more costly items. If you focus only on the high dollar-value items, you run the risk of running out of the lower-priced products that actually contribute more to your bottom line.

Divide materials into groups A, B and C depending on the dollar impact they have on the company (not their actual price). You can then stock more of the vital A items while keeping the B and C items at more manageable levels. This is known as the ABC approach.

Often, as much as 80 percent of a company's revenues come from only 20 percent of the products. Companies that respect this "80-20 rule" concentrate their efforts on that key 20 percent of items. "It's a major mistake to try to manage all products the same way," says Kay Roscoe Davis, a professor of production management.

Once you understand which items are most important, you'll be able to balance needs with costs, carrying only as much as you need of a given item. It's also a good idea to lower your inventory holding levels, keeping smaller quantities of an item in inventory for a short time rather than keeping large amounts for a long time. Consider ordering fewer items, but doing so more often.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

More from Entrepreneur

David provides constructive insight to help businesses focus on their company growth, build brand awareness and know when and how to raise money.
Book Your Session

For a limited time only, get this bundle of Entrepreneur Press® titles for less than $30 (60% OFF) on our bookstore when you use "LEAP" at checkout.
Buy Now

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.