The number one cause of business failure is poor cash flow management. Here are BayCPAPlus tips to help you master this business fundamental.

Skillful inventory management is often one of the biggest factors in maintaining positive cash flow. Consider these techniques for controlling your company’s inventory to improve your cash flow position.

Track inventory turnover

The inventory turnover ratio measures the number of times the inventory is sold and replaced in a given time period (annually, quarterly or monthly). It’s calculated by dividing cost of goods sold by the average inventory.

Let’s say that you’re a retail business that has $5 million in cost of goods sold. At the beginning of the year, your inventory balance is $600,000; at year end, it’s $400,000. That means your average inventory is $500,000 (the sum divided by two). To get the annual inventory turnover ratio, you divide the cost of goods sold by this average. So in this example, the turnover ratio would be 10 ($5 million divided by $500,000). On average, you are selling and replacing your inventory 10 times per year.

Compare historical ratios and industry standards to get a clear picture on the state of your inventory management. Low or deteriorating turnover ratios may indicate that your business is carrying excess inventories. Research to find out why.

Scrutinize Aging Inventory

An aged stock or inventory aging report lists items grouped by the length of time they’re being held in inventory. Like an accounts receivable aging report, an inventory aging report enables you to quatify the cost of specific slow moving inventory items. A way to calculate this is to take the number of units on hand and them determine how many months of sales it will take to sell off the item.

If certain items aren’t selling, they may be obsolete or beyond their shelf life. You may need to write down values in the company records, provide discounted sales or write off specific items by removing them from inventory.

Consider Just-in-Time (JIT) Inventory

JIT is designed to increase efficiency, reduce costs and minimize waste. Companies order goods only as needed. Depending on your business, JIT might be used to lower inventory holding costs, reduce problems with order fulfillment and improve cash flow.

Given the risk of being out of stock, JIT can work for your business if your products can be manufactured or supplied quickly, and your companies order fulfillment system is efficient.

By skillfully managing inventory, your firm can continue to generate positive cash flow, satisfy customer demand and invest in new opportunities.