{{first_name}} Every time I visit a client and notice their warehouse has a back corner that nobody goes near. It holds a pallet of fittings for a product line that was discontinued when flip phones were cool, and a box labelled "DO NOT TOUCH “GARY." Gary retired in 2016.
A while back I worked with a building supply distributor that was doing well, with good sales, loyal contractor customers and a strong reputation. The owner was starting to think about a sale.
When the buyer's team came in, they didn't just look at the financial statements. They walked the warehouse and counted every single item that they could.
They found that a large share of the inventory hadn't sold in over a year. Some of it hadn't moved in three years. On the balance sheet it was all carried at full cost. In the buyer's eyes, a lot of it was worth far less.
That gap came straight off what the owner expected to be paid.
Here's the part that became painful. He'd paid for that stock years earlier with real cash, cash that could have paid down debt, funded growth, or gone into his pocket. Instead it sat on a shelf collecting dust and a forklift scratch or two.
Why slow inventory costs more than you think?
Inventory feels like an asset, and technically it is. But every item on your shelf is costing you money every day it sits there:
Cash. It's money you've already spent and can't use for anything else.
Space. Rent, racking and warehouse square footage.
Handling. Counting it, moving it and working around it.
Insurance and shrink. Some of it gets damaged, lost or walks away.
Obsolescence. Products change, codes change, and customers move on. Old stock loses value every year.
Here's a simple example. Say you sell $10M a year at cost and carry $2M in inventory. That's 5 turns a year, meaning your stock sits for about 73 days on average.
Now say you cut inventory to $1.6M without losing any sales. That's 6.25 turns, and $400,000 of cash comes off the shelf and back into your business. Then add whatever it was costing you each year to store it, insure it and handle that extra stock.
It's the same customers and the same sales, with a lot more cash.
How to wake up sleeping inventory?
1. Run an inventory aging report. Sort every item by how long it's been since the last sale: under 90 days, 90 to 180, 180 to 365, and over a year. Most owners have never seen this report. The first time is usually eye-opening.
2. Know what actually moves. In most supply businesses, a small share of your products drives most of your sales. Those items deserve careful stocking. The long tail of slow items deserves a hard look.
3. Clear the dead stock. You have options:
Return it to the vendor. A restocking fee is often cheaper than holding it another year.
Bundle it or discount it for your best contractor customers.
Liquidate it.
Write it off. Talk to your accountant about the timing.
Every one of these hurts a little. Keeping it hurts more, just more slowly.
4. Stop creating new dead stock.
This is where the real fix lives:
Decide who's allowed to order, and set minimum and maximum levels for your key items.
Require deposits, or non-returnable terms, on special orders.
Be careful with "deal buys." A great volume discount on something you'll sell over three years is not a great deal.
The Number This Week.
Your inventory turns. Here's the formula: cost of goods sold ÷ average inventory at cost. Then look at it three ways:
Overall. How many times a year does your inventory turn?
By category. Which product lines turn fast, and which crawl?
Over time. Is your number getting better or worse over the last three years?
Don't worry about what the "industry average" is. Compare your categories to each other, and compare this year to last year. That will tell you where the cash is sleeping.
The Question This Week?
How much of your inventory hasn't moved in 12 months? Hit reply and tell me your best guess, then run the aging report and see how close you were. I read every reply.
Build Deliberately.
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Why am I writing this? I've spent over 20 years working alongside construction and trade business owners across Canada. My firm, N3 Business Advisors Inc., has helped hundreds of contractors buy, grow, value, and sell their businesses. I started my career as a teacher, and that part of me never left. So once a week, I put one lesson in your inbox, for free, to help you build a business that buyers line up for. If this was useful, pass it to one owner who needs it. If it wasn't, reply and tell me what you'd rather read about.
Nitin Khanna, CFA · Founder, N3 Business Advisors · Mastering the Business of Construction