Mastering inventory levels is a key to many successful and growing businesses. Here are several reasons why proper inventory management can lead to lower costs and higher cash flow:

• Less shrink. Shrinkage represents cash that goes to waste because inventory is damaged, stolen, or past the sell date. Shrink represents an opportunity to improve the inventory control process. Understanding the dynamics of shrink will help focus your attention in the correct areas and ultimately lead to money saved.Action: Create a shrink scorecard that shows the source of shrink. If theft, is it occurring at retail or in receiving? If out of code, is the problem in all products or a select few? If damaged, is it trackable to the supplier or a part of your production process? Remember to compare waste to prior years and against your goals to see how well you are doing.
• More cash. In a perfect world, you sell your inventory as soon as it is received. Material or product that sits in a warehouse adds storage costs, and risks turning into unsaleable product. Aligning your inventory operation with your sales cycle plays directly with improving your cash flow. Understanding sales trends will allow you to optimize your stock levels and save money in the process. When you spend less on unnecessary inventory costs you have more cash to invest into marketing, new product initiatives or capital equipment that can bolster your bottom line.Action: Implement just-in-time (JIT) inventory management with key suppliers. Explore ways to deliver product as you need it versus purchasing a larger amount and then storing it.
• Improved forecasting. The old saying garbage in, garbage out applies perfectly when trying to forecast inventory demand. If you can’t trust your inventory process, it’s impossible to accurately predict future output. This leaves you flying blind when budgeting and preparing for future expenditures. With a firm grip on your inventory needs and procurement-to-sales cycle, your forecasting will become more accurate.Action: Create a rolling 12-month forecast of sales that provide details on major product lines. Translate this forecast into lead times for your inventory procurement.

Better customer relations. Once you’ve optimized your operation, the quality of your customers’ experience increases exponentially. You can cut prices without sacrificing margin, improve lead times, and add new product lines with your extra cash. While the effective inventory process you built is humming along, you can focus your attention on improving your products to better match the needs of your target market. This will help boost your sales!

Action: Set inventory targets to shorten lead times. Measure how many back orders you have and note how often products are returned as defective. If your inventory management is improving, you should see positive results in both areas.