How Important Is Inventory to an American Business?

Companies generate an inventory of raw materials, work in process and finished goods as they engage in their business activities. Well-run businesses seek to manage this inventory effectively to maximize profits.

Importance

According to Microsoft's Midsize Business Center, midsize businesses can increase their annual revenues by as much as 35 percent just by improving their inventory management. Poor inventory control costs a business money.

Management

Businesses should track their inventory levels so they have the right amount of raw materials and finished goods on hand. If a company has more inventory than it needs, it is tying up money unnecessarily. On the other hand, having too little inventory on hand could mean production delays and poor customer service.

Indicator

Inventory investment is such an important aspect of American business that it serves as a leading indicator of business cycles. When businesses sense that an economic downturn is coming, they cut down on inventory investments. Thus, declines in inventory investments may be an early indicator of a downturn.

References

• Microsoft: Midsize Business Center: Business Inventory Management: What you need when your business becomes a midsize company
• ScienceDirect: The Role of Inventory Investment as a Leading Indicator of the U.S. Business Cycle