Using Average Inventory Investment

The average inventory investment period can be used to determine the effect of different inventory investment periods on your business's cash flow. Using the average inventory investment period will help you understand how a change in the average period affects your cash flow. This is best illustrated by the following chart.

Cost of Goods Sold per Day
Average Inventory Investment Per. (days)	$200	$300	$400	$500	$600
	Investment in Inventory
70	$14,000	$21,000	$28,000	$35,000	$42,000
80	16,000	24,000	32,000	40,000	48,000
90	18,000	27,000	36,000	45,000	54,000
100	20,000	30,000	40,000	50,000	60,000
110	22,000	33,000	44,000	55,000	66,000

The above chart illustrates the effect a change in the average investment in inventory has on the investment in inventory for your business. Remember, inventory is money that cannot be used for other cash outflow purposes until the inventory is actually sold. For example, assume that your cost of goods sold per day is $300, and that your average inventory investment period is 100 days. Now assume that you were able to reduce your average investment period from 100 days to 70 days. From the illustration above, you can see that the reduction in the average inventory investment period reduces the investment in inventory from $30,000 to $21,000. This reduction generated an additional $9,000 in your cash flow!