Cash flow problems are some of the most common difficulties small businesses encounter and they are usually the first signs of serious financial trouble ahead. According to Resource Evaluation Inc., a management consulting firm, tying money up in inventory can severely damage a small company's cash flow.

To control inventory effectively, prioritize your inventory needs. It might seem at first glance that the most expensive items in your inventory should receive the most attention. But in reality, less expensive items with higher turnover ratios have a greater effect on your business than more costly items. If you focus only on the high-dollar-value items, you run the risk of running out of the lower-priced products that contribute more to your bottom line.

Divide materials into groups A, B and C depending on the dollar impact they have on the company (not their actual price). You can then stock more of the vital A items while keeping the B and C items at more manageable levels. This is known as the ABC approach. Oftentimes, as much as 80 percent of a company's revenues come from only 20 percent of the products.


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