Inventory and accounts receivable are typically two of the largest assets that a distributor will have and both can significantly influence the viability of the company and the Company’s cash flows. Most companies are aware of the cash flow implications of receivables and work to ensure that customer balances are collected in a timely manner, but inventory is often overlooked. This is largely due to the misconception that it is hard to pull relevant data from the GL in order to accurately analyze inventory.
NAW’s Unlock the Power of Inventory Analytics: Aligning Working Capital to Customer Experience to Maximize Your Bottom Line provides a good background on what information is needed in order to begin benchmarking inventory. The book also walks you through several detailed analytics and provides examples to help understand the procedures. Two of the analytics that would be most beneficial were:
- Gross Margin Return on Investment in Inventory – which measures the return that a company is receiving on their inventory balance. Best in class firms typically have a return of 300% or greater.
- Cash Conversion Cycle – this analytic can be a real eye opener for Companies as it will show how much time it takes for a Company to convert their investment in inventory to cash from sales to a customer. It typically takes a Company 30 to 60 days to convert an inventory investment to cash.
Another important aspect of performing analytical procedures is benchmarking, both against yourself as well as the industry as a whole. Benchmarking against yourself will help the Company to measure whether they are making strides in improving inventory controls and ensuring that there is not an excessive amount of inventory laying around. Benchmarking against the industry can help the Company to determine whether there is still room for improvement.
For questions or help in putting some analytical tools in your company tool box, contact Tony Lane via email here at or call 513-241-8313.