When the cash creek is running dry, business owners have to look closely at how to tap the financial resources dammed up in slow-moving inventory, and how to reduce the stream of regular expenses that threatens to drain the bank account completely.

Most companies can benefit by jumping on the JITney of "just in time" inventory control as a first step, since this approach has the potential to greatly reduce carrying costs.  But how do you reduce inventory so that you are running lean and mean without jeopardizing future sales by being understocked?

Start by calling your trade association to find out the average inventory turnover rate for your industry, and compare that figure with your own average inventory turnover rate to see how good a job you are doing now.  The formula is simple: divide the cost of goods sold by the average value of your inventory to get your average turnover rate.

Suppose Premier Prizes started the year with $150,000 worth of inventory and ended with $200,000; its average inventory would have been $175,000 (the two amounts added together and divided by two).  If the firm sold goods costing $525,000 in the same period, the average inventory turnover would have been three times a year, or once every four months.

If the industry turnover  for the same type of business is four times a year, or once every three months, Premier Prizes has the potential for a 25 percent improvement in its inventory management (using the industry average as a  benchmark that can realistically be emulated).  It doesn't take a genius to calculate that the company could do the same volume of business with one-fourth less inventory or only $130,000 worth, thus infusing its cash flow with the difference -- or an additional $45,000.

The question then becomes one of determining where Premier is overstocked.  To find out, examine the average turnover for each stock item.  By comparing how many of each item was sold in an inventory year with the item's end-of-year inventory, you can come up with an analysis sheet like the following for Premier Prizes:                                  

The chart pinpoints which items of stock can be reduced to the amount normally sold in a quarter, shows where the company is on target, and warns where understocking could cause a problem.  The chart also identifies items with so few sales they should probably be dropped.