Inventory cost is often one of the most substantial factors in the success of a small business. Even among professionally run enterprises, the actual costs of inventory are often inaccurate, underestimated, or incomplete.
Inventory cost is typically defined as the total cost that a company experiences while holding or storing inventory for sale. This includes the money used to purchase the inventory, the space in which the inventory is stored, the cost of transportation or handling, insurance and taxes, and the cost of loss by pilferage, deterioration, and obsolescence.
Calculating Your Actual Cost
But the actual cost is even greater when you include other factors. Improper inventory management can contribute to loss of sales and lower profits. Whether it’s raw material or finished goods, inventory often represents the largest portion of a company’s current assets. How you manage it can greatly influence the cost of carrying your inventory as well as impact future profitability, cash flow, and the ability to pay vendor invoices and other bills. Poor inventory control can cost you in any number of ways, including unnecessary order duplication and unchecked employee theft.
Perhaps the most important factor to consider is the opportunity cost. When you purchase inventory, vital capital is taken out of your business operations and tied up until you sell the inventory. If you’ve maxed out your credit line with vendors or your inventory isn’t turning quickly, it could cost you the opportunity to increase sales by purchasing additional inventory or taking on another product line.
Increase Cash Flow with Inventory Financing
If inventory is a large share of your company’s current assets and you need increased cash flow to help manage business expenses or take advantage of opportunities, inventory financing is a viable option. It allows you to use existing inventory and raw materials as a form of credit, making it an important financing tool for wholesalers, distributors, and manufacturers who may have large inventory assets and limited accounts receivable.
If your company has invested a great deal in inventory that has a fast turnover rate, consider exploring Summit Financial Resources’ inventory financing add-on program. When used in combination with an Asset-Based Loan or Invoice Factoring Loan, it allows you to leverage your existing inventory to provide the working capital to cover business expenses or purchase more inventory. With this, you can keep pace with your customers and stay ahead of the competition.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.