Congratulations! Your company has just completed a successful capital raise. With fresh funds in hand, the pressure is on to deploy that capital strategically. One of the biggest investment decisions many small and medium-sized businesses (SMB’s) face is how much of that cash to tie up in inventory. The right balance is crucial—too much inventory can strangle your business's financial flexibility, while too little can lead to lost sales
and customer frustration.
As you plan your next steps, it’s essential to think beyond just purchasing inventory. Instead, consider how inventory fits into your overall working capital strategy. A disciplined approach to inventory management will ensure that your newly acquired capital fuels sustainable growth rather than becoming an anchor that is a drag on your financials.
Sure, there is a multi-variable equation that solves this optimization problem. However, relying solely on complex models or advanced system applications is rarely the best approach. After all, you just raised capital to fuel your growth, and with growth comes unpredictability. The key first step is evaluating working capital in the context of
your strategic and financial goals.
Let’s take a moment to look at the role of inventory. As the saying goes, “cash is king”, but how does inventory impact your cash flow?
The Hidden Cost of Excess Inventory
It’s tempting to use newly raised capital to bulk up inventory, assuming that having more stock on hand will translate to increased sales. But excess inventory isn’t just a number on a balance sheet—it’s a drain on your resources. Here’s why:
Tied-Up Cash – Every dollar sitting in inventory is a dollar that can’t be used for marketing, product development, or hiring key talent.
Storage & Handling Costs – Warehousing space, insurance, and potential damage or obsolescence add up quickly.
Discounting & Write-Offs – Overestimating demand can force you into markdowns that eat away at margins or, worse, result in unsellable stock.
Missed Strategic Investments – Locking too much cash in inventory may prevent you from seizing new opportunities, such as expanding into new markets or upgrading technology.
A look at Amazon Marketplace terms offers a useful proxy for the true cost of inventory. Amazon’s standard pricing is designed for fast-moving products, but if your inventory lingers—whether due to overestimated demand, high return rates, or frequent cancellations—you’ll face additional costs. Aged inventory surcharges and potential impacts on payment terms can quickly erode profitability. Applying the same level of scrutiny to your own
inventory strategy will help you uncover hidden costs and identify opportunities to optimize your business.
The Risk of Under-Investing in Inventory
On the flip side, not having enough inventory can be just as damaging. Running out of stock at the wrong time can:
Lead to Lost Sales – If customers can’t get what they need when they need it, they may take their business elsewhere.
Miss Growth Opportunities – If demand spikes and you can’t meet it, you’re leaving money on the table.
Increase Costs – Rushed replenishments or expedited shipping to cover stockouts can erode profits.
The height of COVID offers a clear lesson in the risks of under-investing in inventory. Many consumer goods companies faced unprecedented demand spikes, leading to two common outcomes: (1) lost sales due to stockouts, particularly for perishable goods, or (2) skyrocketing costs from expedited shipments—Peloton, for example, resorted to expensive air freight to shorten delivery times. While COVID was an extreme case, demand
uncertainty is always a factor. Strengthening your forecasting through scenario planning and strategically positioning inventory—whether in raw materials or finished goods—can help minimize stockouts, control costs, and prevent lost sales to competitors.
A Strategic Approach to Inventory & Cash Flow
So how do you strike the right balance? The key is to take a strategic approach, supported by data-driven decisions. Here are five steps to help allocate your capital wisely:
Define Your Risk Appetite – Before making any inventory commitments, determine how much working capital you’re willing to allocate. Consider your overall business strategy and financial health to ensure inventory investments align with long-term goals.
Run Demand Scenarios – Demand is inherently uncertain (unless you are in an industry with long-term contracts). Use historical data, market trends, and competitive analysis to forecast demand under different conditions. Consider seasonality, economic shifts, and potential disruptions.
Set Inventory Targets – Establish clear targets based on inventory turnover rates, service levels, and working capital constraints. Define acceptable levels of safety stock.
Leverage Technology & Data – Technology can be a game-changer—but only if it aligns with your needs. Evaluate whether inventory management software or an advanced planning system is the right fit for your business.
mprove cash-to-cash cycle – Your vendors and distribution partners have a vested interest in your success—when you grow, they grow. Work with them to negotiate flexible payment terms and lean out your supply chain to reduce lead times.
Conclusion: Inventory as a Growth Enabler
Managing inventory effectively is about optimizing cash flow so that your capital works harder for your business.The goal should be to strike a balance that allows you to meet customer demand while maintaining the financial flexibility to invest in growth.
As your company puts its newly raised capital to work, think of inventory as a liability that only becomes an asset when deployed right. A well-managed inventory strategy will allow you to scale efficiently, adapt to market changes, and build a foundation for long-term success. Make your capital count by ensuring that every inventory dollar supports—not stifles—your company’s growth.
There’s no one-size-fits-all approach to getting it right. At Assetive, we help clients scale at the pace that aligns with their growth strategy. Inventory is just one piece of the puzzle, and we’re here to help you integrate it into your broader business objectives. Let’s talk—reach out and share a bit about your business.
Comments