Your inventory could conceivably represent more than 50 percent of your current assets. This is a significant amount and means that you must keep a close watch on this account. You should know whether the amount of inventory is reasonable in relation to sales and other operations of your business. Know how rapidly your inventory turns over. Be sure you’re not investing in slow-moving items (six or less turns per year). Balance your material and tool purchase decisions between maintaining an adequate supply on hand against possibly losing sales due to an inadequate supply. Take action to maintain the size inventory necessary to get the job done effectively and profitably.

How large should your inventory be? If you have an efficient estimating system (particularly a computerized one), you’ll maintain a very low inventory and order materials as a contract is received. Materials are to be shipped to the jobsite as each section is ready for work and in sufficient quantities for that amount of work. An added advantage to this kind of control will be less theft, waste, loss and pilferage, because you’ll not be over-ordering and leaving extra materials around after the work is done.

By maintaining the lowest possible inventory, you improve cash flow. However, it’s possible to affect savings by buying in truckload quantities that qualify for a discount. You may also order materials for possible future work when you have information that the price will be increased shortly. Be sure that the extra handling and storage cost over a long period of time doesn’t eat up anticipated savings. Remember that low price is not everything. You’ll want to develop a relationship with suppliers who will help you solve your problems and be there when you need them.

Excess inventory usually is maintained until it “ages” and the cost of storing it, moving it, and ultimately dumping it costs more than the value of the material stored. Clean up and get rid of “junk.” If you don’t need something, don’t pay to store it. Identify your dead inventory on a regular basis. Consider the handling costs and the management costs involved in maintaining unneeded items.

Use your inventory evaluation as a measure of your ordering procedures. Determine what you ordered and what you used. If there’s a discrepancy, try to determine if it’s because of an incorrect ordering procedure or due to a situation beyond your control. Donating new but unneeded materials to local trade and technical schools can sometimes be used for tax and personnel recruitment advantages.

Mike Holt’s Comment: This newsletter was extracted from my Business Management and Management Skills’ Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to

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