Q. I own an automotive supply store and am not realizing the level of profit that I should. One of my investors says that I seem to be having trouble with my inventory. What are my major opportunities in this area?

A. Inventory can represent a large portion of the business investment and must be well managed to maximize profits. Many businesses tend to lean toward keeping inventory level on the high side to insure stock is available when needed. However, this can result in too high investment, which will yield a lower return on the dollar invested. What most new business owners need to learn are the skills to improve their inventory turnover so that they can avoid many of the pitfalls. What you can do to accomplish this covers a wide range of actions, and over time some may prove more "doable" than others, but there are skills that can be developed.

1. Maintaining the proper balance of required items can be an important step because it enables you to keep your inventory investment at the optimized level without endangering your ability to take advantage of sales opportunities. Aside from acquiring this knowledge through experience; quicker more reliable information can be acquired through your trade association, suppliers, reference materials and in some cases your competition.
2. Increasing your inventory turnover is the result of being able to maintain levels of inventory items that meet but seldom exceed demand. For example, if you have a tire store, your supplier can provide you with accurate information as to the sizes and makes that sell the best as well as those for which there is very little demand. In the case of the former you will stock in quantities that most likely will satisfy immediate demands while, for the slow movers it may be possible not to carry any in your inventory but have the ability to get quick delivery if the need arises. Similar actions can be taken in most businesses where inventories are required.
3. Obtaining best prices on inventory through creative supplier networks generally will come with time and experience. You may find the certain suppliers can offer better prices on specific makes and models than others can and visa versa. In addition, some suppliers may offer you the opportunity to return certain unsold merchandise at a much better price level than others—check it out.
4. Eliminate obsolete items as quickly as possible. Such inventory represent invested capital that is not earning you any return. Reduce the price of such items to whatever level is necessary to eliminate them. In some cases you may find that donating these items to a charitable organization can serve a real need and gain for you some excellent publicity and provide you with a deduction for tax purposes by reducing profit.
5. Reduce inventory shrinkage. Such shrinkage is the result of merchandise becoming worn or soiled, stolen, or broken. Theft can be greatly reduced by having in place visible surveillance cameras and strategically placed observation mirrors. It is also generally a good idea for you and one or more of your employees to walk about the store, particularly if you have aisles where overall visability is limited.
6. Increased cash flow and working capital goes hand in hand with maintaining good inventory turnover. Every item of inventory represents an investment of your capital and until it is sold that investment and the potential cash flow it can generate is dormant. A fellow SCORE counselor, Oliver Mann, says "The only good inventory is that which has been sold and paid for" and that about says it all.
7. Reduce insurance cost by keeping inventories at an effective level. The more inventory you maintain the higher your insurance cost because the level of risk rises with the higher level of dollar inventory. A review of rates and risk assumptions with your insurance agent can go a long way in helping you understand and manage such cost.
8. Reduce personal property taxes in the same manner as you control insurance cost. Many taxing authorities tax the assets of a business and consider inventories as a part of that calculation. In addition, some taxing authorities allow the business to average its inventory over the year so that seasonal businesses are not penalized by having their highest level of inventory in a month when taxes are assessed. Be sure you and your accountant have a good understanding of these various systems.