The health of a business is dependent upon cash flow. So you need to be conscious of ways of using funds more efficiently.
Owning a business that carries inventory for resale presents special challenges. Inventory items drain your cash, but managing inventory for resale actually drives cash into your business.
Use financial information regularly to monitor your inventory levels. Your optimal amount of inventory is just enough on hand to meet customer demand. The secret to managing this successfully is by measuring inventory turnover. This is the ratio of your cost for items sold from inventory to the cost of inventory on hand. Put another way, divide cost of goods sold by current inventory: If you sold widgets last month that cost you $300 and you paid $100 for widgets on hand, your inventory turnover is three times per month.
This measure is only reliable if your accounting separates the cost for inventory items from any other category within cost of goods sold. Ideally, you want a breakdown of the cost of goods sold and the current inventory figures for each item your business sells. Downward-creeping inventory turnover is a signal you need fewer items on hand to meet demand.
Of course, occasional physical inspections are necessary to ensure that inventory figures are accurate. Count the number of units in an inventory item category and multiply by the cost per unit. This is tedious work, but you can always hire a service to do it.
A bookkeeping entry corrects your financial statements to match the inventory count.