“The more inventory a company has, the less likely it is that they have what they need.” – Taiichi Ohno
We look at inventory stacked up and think of it as money in the bank. It’s time to start recognizing it for what it is—frozen cash that is far from an asset. It’s a necessary part of doing business, but we want as little of it as possible.
Inventory as an Asset
According to your Balance Sheet, inventory is equal to money in the bank. Appearing right next to cash in “Current Assets”, the visual implies that inventory is reliable revenue but it glosses over this tiny detail: inventory needs to be sold before it does you any real good.
As any business person knows, however, selling inventory is no small detail. It goes rotten, becomes obsolete, breaks, gets lost, gets stolen, gets wet, has defects, oversaturates the market, and goes out of style.
The practice of Balance Sheets is hundreds of years old, and speaks to a time when buying and selling was a simpler game. Now the complexity increases every year.
Inventory is a current asset when it’s sold. Until then, it’s a block of ice with all your cash frozen inside of it. In that sense, it’s not an asset at all, but a potential liability. The difference between those two is a razor’s edge.
Things to Consider
It’s true that you can’t sell from an empty shelf. We can’t do business without inventory, and the more we have, the more we can make.
You buy inventory with working capital (ie. cash). Cash is the oil in the engine of your business; without it, the system seizes.
The Key to Making Inventory an Asset
Think of it this way; inventory is an asset up to a certain degree, at which point it starts to become a liability. It’s a question of how fast you can sell it.
Turning your inventory is what makes it an asset. The faster your turns, the more flexible you are.
But fast turns take discipline. It’s about keeping your hand on the wheel and your eyes on the road ahead.
Buy less, sell it faster, buy more, and repeat. It’s how to keep inventory as an actual current asset, and not let it turn into boxes of frozen cash getting dusty in the back storeroom.
It sounds easier than it is, but there’s often low-hanging fruit. Re-evaluate those volume incentives you’re offered, or how long it takes to sell the last 25% of product—and whether you’re getting all your money for it. Numbers don’t lie, so let them talk you through the solution to your inventory problems.