Raw materials, materials in process or finished goods represent inventory. Merchandise stock is a major portion of your investment in the business. Old goods often have to be discarded, which represents and unrecovered expenses. Such discounts can often eliminate profit on the item. You want to maintain enough inventory to meet demand, prevent product aging and avoid under-performing products in the industry.
Inventory management is difficult.
There are tangible expenses associated with carrying an inventory that extend beyond the direct costs of purchasing an inventory. Storage, insurance, taxes and staff time to manage an inventory all tie up cash the business would otherwise have for other operating expenses or profits. Small reduction in an inventory investment may result in large changes in the firm's cash position. However, the small business owner must balance the need to control inventory size with the desire to maintain an assortment of products that can be purchased in sufficient volume to earn purchasing discounts. A varied assortment of products should be maintained in order to meet the demand of today's customer, who likes a choices of products within any given product category.