How does inventory affect costs? Why is reducing inventory beneficial for retail businesses?
Inevntory is a depreciable asset that impacts the balance sheet. Any asset needs to be working, meaning making money somehow for its owner. By having excess inventory, owners bear the buying costs for stuff that literally sits there and just depreciates with time- meaning its a bad investment. In the retail business, this problem is especially stark because consumer demand is so fickle that hot inventory now can be garbage tomorrow. Imagine you had a clothing store that stocked up on the latest leather handbags, only to find out that there’s a new movement toward environmentally conscious products (common issue), all the bags u bought are toast overnight. You’ll have to eat that cost as a tax write-off. This is why its important for retailers, not necessarily to reduce inventory, but streamline wholesale purchasing in a way that can be shifted quickly.
