Inventory is Capital, and it Quietly Costs More Than You Think

In nearly every small or family-owned business I’ve worked with, inventory feels like security.Owners tell me, “I just want to have everything in stock so I never miss a sale.”That logic makes sense — until you look at the numbers.

The reality is that inventory is capital, not security. Every box in your warehouse is a cash investment that has to earn a return. And too often, that investment is underperforming badly.

Inventory Turns: The Productivity of Capital

The simplest way to measure how effectively you’re using inventory is through inventory turns:

Inventory Turns = Cost of Goods Sold ÷ Average Inventory Value

If your cost of goods sold (COGS) is $2,000,000 and your average inventory value is $500,000, your turns are 4.That means you sell through your stock roughly every 90 days.

If you can improve that to 6 turns while maintaining sales volume, your average inventory falls to about $333,000 — freeing $167,000 in working capital and cutting tens of thousands in carrying costs.That’s not accounting theory; that’s cash back in your business.

The Hidden Cost You Don’t See Leaving the Bank

Many owners say, “I don’t see that money leaving my account — so how is it costing me?”Because it leaves in pieces — quietly and constantly — across five or six categories:

1. Financing cost: If your line of credit is 8% and you’re sitting on $500,000 of inventory, $40,000 a year is the cost of capital alone.

2. Opportunity cost: Even if you’re debt-free, that $500,000 could be generating a return elsewhere — marketing, technology, or simply reducing risk.

3. Physical storage: Rent, utilities, shelving, forklifts, and labor all scale with inventory. Reduce stock, and these drop in step.

4. Obsolescence & shrink: Slow movers become outdated, damaged, or lost — each write-off is a real dollar gone.

5. Insurance & taxes: You insure and pay tax on every dollar of inventory you own, whether or not it’s earning a return.

Add it all up, and typical inventory carrying cost runs 20–30% of average inventory value per year.That means a half-million in stock is draining $100,000–$150,000 annually — whether or not you ever cut a check labeled “carrying cost.”

The Overstock Trap

I’ve seen it repeatedly: small businesses with healthy sales but poor cash flow because they’re overstocked.Owners want every SKU available every day — “just in case.”They buy to avoid missing a sale, but the result is worse than a missed sale:

• They run out of cash.

• They take on debt to cover payroll.

• They discount inventory just to move it.

In most cases, the cost of always being in stock exceeds the cost of the few sales you might miss.Over-availability looks like service excellence, but it’s often just expensive comfort.

How to Turn Inventory Into a Strategic Asset

You don’t fix this by cutting everything overnight. You fix it by getting precise:

• Use real consumption data to set reorder points.

• Segment your inventory — focus on A-items that drive margin, not every SKU equally.

• Measure turns monthly, not annually.

• Align purchasing with sales forecasts, not supplier discounts.

• Treat slow-moving inventory as idle capital — because that’s what it is.

The goal isn’t zero inventory; it’s high-velocity inventory.When your turns rise, cash flow accelerates. The same sales volume supports a leaner balance sheet and higher return on capital.

Final Thought

Inventory management isn’t a warehouse problem — it’s a financial strategy problem. Businesses that understand that distinction outperform those that don’t, because they recognize that cash locked in inventory is cash that can’t grow the business.

At Tarver Associates, I’ve seen what happens when owners make that mental shift.They stop treating inventory like insurance, and start managing it like investment capital — because that’s exactly what it is.