Is excess inventory holding you back?

Excess inventory is the stock a business holds beyond what it needs to meet current demand. It’s the unsold goods sitting quietly on your warehouse floor, on the shelves of your third-party logistics (3PL), or in climate-controlled storage. It can be easy to overlook; just a part of the furniture. Potentially an annoyance, perhaps an eyesore—but ultimately posing no real threat to the key drivers of your business’s success. Unfortunately, this outlook can cost businesses an unfathomable amount of money. It’s estimated that globally, the cost of excess inventory is up in the trillions.¹

A wolf in sheep’s clothing, surplus inventory isn’t typically the first place businesses look when hunting for leaks and blockages in their financial circulation, yet it’s an issue that can lead businesses into significant financial distress. This is because unlike ‘standard’ inventory, which is realised as cash within a manageable timeframe, excess inventory stays idle—tying up capital while snowballing holding costs. On top of this, there’s higher risk that excess inventory will lose value before it can be sold.

Leading causes of surplus inventory

There’s no single cause for excess inventory. It can stem from inaccurate demand forecasting, supply chain disruptions, or gaps in inventory management—sometimes it’s just a perfect storm of many small things going awry. That’s not to say this is always the case. There are some instances where holding more inventory than usual is a deliberate, strategic move.

For example, if you know a component’s price is about to rise, you might choose to purchase extra stock now. This could protect your gross profit margin or allow you to delay passing the price increase on to customers, giving you a short-term competitive edge and increasing your market share.

The challenge with this approach is funding it. If you plan to invest millions in additional stock, you need the cash to make that happen and a clear plan for how it plays out. That means modelling scenarios such as:

If we delay the price rise, how much extra market share could we gain?
When would we bring prices back in line with competitors?
Will that additional market share stick around long enough to justify the upfront investment?
What are the associated carrying costs and how does this impact the bottom line?

Strategic overstocking can pay off, but the key word here is ‘strategic’. For it to be an action that offers genuine financial advantage, it needs to be supported with solid planning and scenario modelling.

The hidden costs of excess inventory

An excess inventory issue can silently feed on a business’s resources. Over time, it can tighten its grip, slowly but surely restricting growth and draining profitability.

Tying up cashflow
The biggest cost of excess stock is the strain it puts on cashflow. Inventory is a working capital item, meaning it directly ties up free cashflow that could otherwise be used to run or grow the business. Most businesses fund their working capital through an overdraft. If you’re holding slow moving items or more stock than necessary, that excess is essentially sitting in your overdraft, costing you in interest.

For example, if you’re carrying $1million more inventory than you need and your rate is 6% (a conservative estimate in today’s market), that’s $60,000 a year in costs you could avoid.

This is where tools like the three-way forecast become invaluable. If we identify that a business is overstocked, we can model an optimisation strategy and show exactly what that $60,000 could do elsewhere—whether that’s funding growth, investing in marketing, or improving operational infrastructure—instead of sitting idle on the balance sheet.

Lender perception

Excess stock can also influence how lenders view your business. Banks and other lenders assess working capital efficiency using metrics like inventory, creditor, and debtor days.

If you’re seeking finance for working capital, your inventory performance will be scrutinised. Unsatisfactory metrics can affect serviceability—the lender’s perception of your ability to meet repayments. In some cases, demonstrating a credible plan to optimise inventory can improve your standing with a lender.

Carrying costs

Beyond the financing impact, there are the direct carrying costs: administration time, insurance, labour, freight, storage, and the utilities required for each of these steps. These add up quickly.

Take storage, for example. If excess stock is taking up valuable warehouse space, you’re effectively paying for a larger footprint than you need.

Freight is another hidden cost. While the product cost appears in your inventory account, freight often goes straight to the profit and loss statement. From a purist accounting perspective, costs associated with holding inventory should be capitalised into the cost of inventory so they’re matched with the sale. In practice, many businesses expense these costs immediately, creating a disconnect between when the cost is recorded and when the revenue is earned.

Regardless of how it’s accounted for, freight, storage, and utilities all add to the real cost of excess stock. Left unchecked, they chip away at margins and tie up resources that could be put to far better use elsewhere.

Spotting an excess inventory issue

The sooner you recognise excess, the sooner you can stop it from quietly bleeding your business. While the warning signs aren’t always obvious, a deliberate, regular review of your inventory can reveal the warning signs before they escalate.

One of the simplest ways is to run detailed inventory lists—particularly for businesses like buy-and-sell distributors, that have a long and varied product range. Reviewing these lists regularly, with a focus on slow-moving items, can quickly show where capital is tied up unnecessarily.

For example, with one wholesale client, we receive their inventory report every month as part of the month-end accounts. We start by sorting the list from highest to lowest value. From there, the questions practically write themselves: Why are we holding so much of this? Is there a genuine reason? Sometimes there is—but other times, the report exposes issues with the inventory management system itself, such as negative-value items caused by data entry errors. Those errors can have a direct impact on reported profit, so catching them early is key.

Another useful measure is inventory days. This tells you, on average, how many days’ worth of stock you’re holding before it’s sold. If that number is high, it means stock is sitting for longer than it should be—tying up cash and adding carrying costs. For instance, an inventory days figure of 100 means you’re holding enough stock to cover 100 days of sales, which could be positive, negative, or neutral, depending on your industry and unique situation.

Context is everything here, which is where benchmarking comes in. Industry benchmarks can help you understand whether your inventory levels are in line with expectations or drifting into excess. We often draw on sources like IBISWorld, industry peak bodies, or sector-specific reports. Comparing your inventory metrics against relevant, current data gives you a clear picture of how you’re performing and where there’s room for improvement.

Turning excess stock into cashflow

For many businesses, reducing excess inventory is one of the fastest ways to improve cashflow. Unlike chasing overdue invoices, you don’t have to wait for someone else to act—you can make the decision today and see results within 30 days. There’s an almost-immediate payoff.

Take one client, a food manufacturer. They buy large volumes of raw product during the harvest season, storing it until needed for the manufacturing process. Last year’s purchasing overshot demand, leaving those stores packed with raw stock. This cost a fortune to hold and was eventually sold off at a discount to free up cashflow.

Through three-way forecasting, we modelled purchases against a realistic forward sales forecast. The new plan means buying less, avoiding extra storage, cutting labour and machinery costs, and freeing up hundreds of thousands in working capital. Because the excess stock wasn’t moving quickly anyway, there’s no hit to sales—just a healthy lift in cashflow.

And that’s the real power of tackling excess inventory. If there's one thing you take away from this article, let it be that this is a genuine strategic lever you can pull to move you closer to your goals.

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If you suspect excess inventory is weighing your business down, get in touch with the Business Insights team today.

Sources

¹  Harvard Business Review, The next supply-chain challenge isn’t a shortage—it’s inventory glut, 2023

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