The more money you have tied up in inventory, the less you’ll have to cover essential daily expenses such as rent and payroll. You might be able to get better prices on inventory by buying in volume, and your production may be more efficient when you produce more inventory and achieve economies of scale. However, cash-flow shortfalls can easily wipe out these advantages. If you end up short of cash, you will need to borrow money, and then you’ll have to pay interest and finance charges to make ends meet. And if you come short on capital because you’ve spent it all on excess inventory, you will not be able to take advantage of opportunities that require capital.
The inventory you have on hand today may not be the inventory your customers want tomorrow. There’s no way to forecast demand with complete accuracy because tastes and circumstances constantly change. Clothing goes out of style and economic climates shift, making customers more likely to buy pricier or less-costly items, depending on the economy. Innovations render established products obsolete. A perfect example is digital photography that has put a very serious dent in the 35mm-film industry. The more inventory you have on hand, the more will lose when your customers no longer want what you have.
Inventory takes up too much space. The more inventory you have, the more you must store. If your storage space is limited, you may find it difficult to find space for items you need because you’ve purchased other products in volume. Perishable inventory needs to be constantly rotated. If you have more inventory than you can manage, it will be more difficult to keep track of dates. Handling excess inventory takes additional labor hours, which can cancel out the savings you get with volume discounts.