A great ski retailer in Massachusetts named Roger Buchika once said “the less inventory you buy, the more money you make.”

What Roger meant was that too much inventory can put you out of business really quickly.

As a matter of fact, the biggest mistake retailers make is overbuying.

There are plenty of tools available that one can use to forecast inventory requirements so you can avoid this. Today's operating systems have inventory forecasting tools that will allow you the opportunity to see where the inventory overages are. Every area you have an inventory overage poses a risk. I am of the opinion that the best solution to an inventory overage problem is to price the product low enough to move as soon as possible. It makes absolutely no sense to sit on it when you can turn it into cash, no matter how small, and reinvest it into fresher, faster moving inventory.

For example, I once had a client in the distribution business and because of a promotion that did not meet sales expectations, the company was sitting on a seven year supply of product. Inventory promotions that don't meet sales expectations are common and no one should be kicking themselves for taking a shot on a promotion even though it didn't work.

However, when a promotion does not work and results in an inventory overage, one should work to address it. The problem immediately, we got an offer of $15,000 for product that had an inventory cost to my client of $60,000, and at regular prices, he could sell that inventory for a hundred thousand dollars.

My suggestion was to take the $15,000, reinvest it into fresh, fast moving inventory, which was turning over eight times per year at a 40% profit margin. My client thought that if he could sell 15% of product inventory at regular prices, he could make the $15,000 in cash flow that he was being offered today and still have the rest of the inventory to sell.

Well, that was true, but it would take one year to do it. It is based on the slow moving inventory turns of the product. In the meantime, by taking the $15,000 today, reinvesting it in fresh, faster moving inventory that turns eight times per year, we would've generated an additional $200,000 in cash flow that year. And that was calculated by taking the $15,000 that we received for product day. That's the investment divided by 0.6, which was the reciprocal of the 40% profit margins.

We were able to achieve eight turns or eight times a year, and that would generate an additional $200,000 in free cash flow that year.

So as you can see from this example, because of the inventory turnover of the more productive

inventory, it pays to cut your losses and get rid of the slower moving inventory.