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Inventory Management: Key to Business Success

Inventory encompasses the stock of raw materials and finished goods a company maintains at any given time. As an asset, inventory serves as one of the backbones of any business, and it is crucial for every business owner to manage their inventory correctly as it can directly impact the cash flow, operations, and customer satisfaction. So, new and seasoned business owners, let’s dive into this and let’s give you the super Profit First tips on how you can efficiently manage your inventory. 

What is Inventory?

Inventory refers to the collection of goods, materials, or products held by a business for the purpose of production, distribution, or sale. Different businesses have different types of items in their inventory. For example, food businesses would have raw ingredients and packed goods, while clothing businesses would have inventory full of apparel, accessories, seasonal clothing, and many more. In general, inventory items range from raw materials, work-in-progress items, and finished goods. Proper inventory management reduces the risk of stockouts, spoilage of materials, and dissatisfied customers. 

Tips On Managing Your Inventory

Managing your inventory can be challenging, even seasoned entrepreneurs face challenges with inventory management. As your business grows, the more complex your inventory will be. There are factors such as unexpected shifts in customer demand, issues with your suppliers, or market fluctuations that need constant adaptation of inventory strategies. 

Here are tips on how you can manage your inventory and be a master of it. 

Have a separate account for your inventory

It is better to maintain separate bank accounts for specific financial purposes. The five foundation accounts are profit, owner’s pay, tax, operating expenses, and implementation. Having just one checking account for everything gives you a false belief that you have so much money, and business owners tend to spend that money thinking that they have a lot. What then happens is that you don’t have enough money to buy inventory, and then you would have to borrow money to pay for the inventory. The thing in Profit First Nation is “When in doubt add an account”, the more accounts you have, the more clarity you have about what is the cash purpose. By allocating a specific percentage of income into your inventory account, you can ensure that there are enough necessary funds to replenish your inventory.

Assess the profitability of each product you are selling

Not all inventory items are created equal in terms of profitability. Some products earn more and have higher returns, while others may earn less. It is important to assess the profitability of each product to identify the winners and the underperforming items. Once you have assessed this, you can invest more in the items that sell more and get more profit. 

Keep track of inventory days

Not all items in your inventory can last for a long time, especially if you are in the food business. You always need to consider how long the current stock will last. Make sure that you do not have so much more than you need, or too little. Running out of inventory can result in loss of sales, if you don’t have that item, your customers are going to look for that item in a different store. If you are an online seller, you can lose your place in the rankings if you are not selling enough, and it can take a lot of money to build yourself again. 

Be creative in removing underperforming items in your inventory 

There are ways where you can get rid of your big stocks of underperforming items that you don’t need without having it all go to waste. Some business owners decide to donate perishable items to food kitchens, there are others who make deals to sell their products for wholesale prices to resellers. There are a variety of things that you can do to get rid of products, just ask yourself “How can I get something back out of this and the product still be beneficial to someone else?”

Advertise within your means

It is essential for businesses to connect their advertising efforts with their inventory levels. You cannot keep on advertising a product that you do not have enough inventory of. Make sure that you connect the dots between your advertising spend and your inventory so that you are not spending more dollars on something that you are not going to be able to deliver in a timely manner. 

Another thing that you need to keep an eye on is the return on your advertising spend or what is called the Media Efficiency Ratio. You can calculate this by taking the dollars that you are spending on advertising, and dividing it by the revenue that you are getting. The primary objective of advertising is to increase revenue. Businesses must not lose sight of this goal, if your advertisements are not giving you revenue, then maybe you should think of other ways or other strategies that will work for your business. 


In conclusion, your inventory is one of the backbones of your business and it is crucial to master its management. Proper inventory management impacts cash flow, your operation, and customer satisfaction. Always monitor your products and have more winning and in-demand items in your inventory, if you have lots of items that are underperforming, there are many ways to get rid of them while also not letting them go to waste. Advertising for sure is a good way to get your products more attention, but do not forget to keep track of its media efficiency ratio. Remember to just spend within your means. Proper inventory management is a continuous process that requires different strategies in different stages of your business. 

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About The Author

  • Profit Nation


    Danielle Mulvey is your Certified Profit First Mastery "Podcast Guide" and Mike Michalowicz is the author of Profit First. Both Danielle and Mike were members of YEO before they had to drop the "Y" and part of Birthing of Giants at MIT when they were both in their 20's....that gives them a combined 50 years of entrepreneurial experience and counting.