How to Manage Your Inventory to Free Up Cash
By Jon Orr, Managing Director, Optimas Financial & Accounting Solutions
Are you challenged with ways to grow your business? Do you wish you could hire more staff, upgrade your computer systems, or make improvements to your workspace?
You may be able to achieve these goals without ever increasing revenue. With sufficient levels of working capital – that is, current assets (cash, accounts receivable, and inventory) minus current liabilities (accounts payable) – you can free up cash and invest it back into the business.
Simply staying on top of your inventory may be enough to get you there. In this article, we’ll look at establishing key performance indicators to help you manage your inventory. Click here to see 7 Strategies to Find Cash Through Inventory Management.
The Power of Measuring Inventory
The best way to manage any component of working capital is to continuously measure your performance and look for new ways to improve. Two financial ratios provide effective Key Performance Indicators for measuring your inventory management performance.
The Inventory Turnover Ratio determines the rate at which inventory is being used annually:
Cost of Goods Sold / Inventory = Inventory Turnover
For example, an Inventory Turnover Ratio of 10.55 means that the average dollar volume of inventory is used up almost 11 times during the fiscal year. By increasing your Inventory Turnover Ratio, you will decrease the amount of cash tied up in inventory.
The Days in Inventory Ratio tells you the number of days’ sales you have in inventory:
360 / Inventory Turnover = Days in Inventory
For instance, a Days in Inventory Ratio of 34 means that the company keeps an average of 34 days of inventory on hand throughout the year. To free up cash, work toward decreasing the number of days in inventory.
Not Sure Where to Start? We Can Help
What are the right Inventory Turnover or Days in Inventory ratios for your company? Unfortunately, there’s no magic number that’s right for all companies. To begin the process of finding the right level of inventory in your business to free up working capital, look to the experts.
Optimas Financial & Accounting Solutions knows what financial benchmarks are appropriate for your industry. We provide our clients with the comparisons that help determine the best levels for each individual business.
Call us at 630-780-1042 or email firstname.lastname@example.org for more information – and get started on the path to more cash today.
About Optimas Financial & Accounting Solutions
Optimas Financial & Accounting Solutions’ (www.optimasllc.com) mission is to provide business leaders with the information they need and deserve. Optimas delivers cutting-edge accounting services and professional financial analysis and advice to small and mid-sized businesses, turning their accounting and finance departments into profit centers. We offer business accounting and CFO services using the latest technology and economies of scale to lower costs and increase the quality, amount, and timeliness of valuable financial information. Our CFO services also provide the expert financial analysis and insight to accomplish each client’s strategic objectives and increase their profitability.
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