Let's assume that the adage “Cash is King” is the credo of your Company. This being the case, a few basic changes in your processes surrounding inventory can generate an incredibly positive cash flow – at NO COST.
The concept of “Inventory Turns” is perhaps the most difficult concept for the non-finance executives to appreciate. In illustrating the power of inventory turnover, let me make a few basic assumptions; the annual Costs of Goods Sold is $5 million and the inventory at month's end is $769,231.
In this scenario, our inventory turns 6.50 times per year on an average of every 8 weeks (52 weeks / 6.50 turns). In other words, the inventory "rolls through" your organization every 8 weeks. See the following table.
Optimizing your purchasing processes, working with vendors and enhance technology, lets say that you can very conservatively improve seven (7) days in inventory. This equates to Average Weeks of Inventory On Hand of 6.5. Or 8.00 Inventory Turns per year.
This improvement in Inventory Turns generates annual cash of $144,231 - NET CASH. Of course in the non-theoretical world, the savings is significantly greater for the reduction in inventory saves financing costs and the opportunity cost of carrying this Inventory.