A business should maintain an adequate inventory balance to meet demands of its operations, but at the same time keep this balance to a minimum. When a firm has excess inventory, it will have higher operating expenses, reduced solvency, increased risks of losses due to price declines and obsolescence, and, in addition, it limits its chances to take advantage of more favorable investment opportunities. Two measures commonly used to assess inventory management efficiency are
- inventory turnover ratios and
- the number of days' sales in inventory.
These figures must be compared with industry averages to properly evaluate inventory management.