For businesses that carry physical stock, inventory is often the single largest component of working capital — and the one with the most untapped opportunity. Excess stock does not just sit on a shelf. It consumes cash, incurs storage costs, risks obsolescence, and masks poor planning decisions. Yet most SMEs accept high inventory levels as a cost of doing business rather than a problem to solve.
The instinct to hold "a bit more stock just in case" is understandable — the consequences of a stockout are immediate and visible, while the cost of excess inventory is slow and hidden. But carrying costs for excess inventory typically run between 20 and 35 percent of inventory value per year, when you account for storage, insurance, handling, obsolescence risk, and the opportunity cost of the capital tied up. That is a significant drag on profitability and cash flow that does not appear on any invoice.
The goal of inventory optimisation is not to cut stock indiscriminately — it is to hold the right stock in the right quantities. At Coca-Cola Europacific Partners, I worked alongside supply chain teams managing inventory across multiple markets with billions in product value. The principles that drove DIO (Days Inventory Outstanding) improvement at that scale apply directly to the SME context — and in many ways, an SME has more flexibility to act quickly than a large organisation does.
"The advice is not to cut stock. The advice is to cut the wrong stock — and to stop accidentally creating more of it."
What DIO Tells You
Days Inventory Outstanding (DIO) measures how many days your inventory sits on hand before it is sold. It is one of the three components of the Cash Conversion Cycle, alongside DSO (receivables) and DPO (payables). A lower DIO means your inventory turns faster — cash moves through the business more quickly instead of sitting in stock.
DIO = (Average Inventory ÷ Cost of Goods Sold) × Number of DaysIf your average inventory is €150,000 and your cost of goods sold over the last 90 days is €450,000, your DIO is (150,000 ÷ 450,000) × 90 = 30 days. That means your stock turns every 30 days on average. If that same inventory level exists against only €270,000 of COGS, your DIO rises to 50 days — meaning capital is moving through your business significantly more slowly.
Benchmarks vary considerably by industry. Retailers with fast-moving goods often run DIO of 20–35 days. Manufacturers with complex production cycles may run 60–90 days. The comparison that matters most is your own DIO over time — is it improving, stable, or drifting upward?
What a DIO Reduction Is Worth
The financial case for inventory optimisation is direct. Every day you reduce DIO releases cash equal to one day of your cost of goods sold. The formula: (Annual COGS ÷ 365) × Days Reduced = Cash Released.
This is permanent cash — not a one-time benefit that reverses, but a structural improvement to your working capital that continues to benefit your cash position indefinitely. And it comes without a single new sale, a new customer, or an external loan.
Segment Your Inventory with ABC Analysis
The single most useful thing you can do before making any inventory decision is to classify your stock using ABC analysis. This segments every item you hold into three categories based on its contribution to your revenue or COGS, and it immediately tells you where to focus your attention.
Your highest-value items. Typically represent 70–80% of your total COGS or revenue. Manage tightly: accurate forecasting, low safety stock, frequent review. Never stockout on an A item.
Mid-value items. Around 15–20% of COGS. Moderate management attention: regular review, reasonable safety stock. Monitor for movement toward A or C.
Low-value, slow-moving items. Only 5–10% of COGS but often 40–50% of your SKU count. These are where excess inventory accumulates. Rationalise, reduce, or eliminate.
The practical implication is counterintuitive: your C items — the ones that feel easiest to ignore because they are individually cheap — are where most of your inventory cash is quietly trapped. They accumulate through habitual reordering, minimum order quantities, and "just in case" thinking, and they are rarely reviewed because no single item seems significant. An ABC analysis makes the aggregate visible.
Once your inventory is classified, the decision process becomes much clearer. A items get tight management and accurate forecasting. C items get rationalised — either eliminated, consolidated, or moved to order-on-demand rather than held as standing stock. B items sit in between and are reviewed regularly to see whether they are migrating up or down.
Identify and Act on Slow-Moving Stock
Slow-moving stock is one of the most reliable indicators of excess inventory — and one of the easiest to act on once it is visible. The question to ask for every item: how many days has this been in the warehouse, and is that justified by my current sales rate?
Set a slow-moving threshold
Define what "slow-moving" means for your business. For most SMEs, any item that has been in stock for more than 60–90 days without movement deserves scrutiny. Any item over 120 days is almost certainly excess — and should be treated as a cash conversion opportunity, not a permanent fixture.
Take deliberate action on each item
For every item that crosses your slow-moving threshold, make a conscious decision: sell at a discount to clear the stock and recover cash; return to the supplier if your agreement permits; bundle with a faster-moving item to increase attractiveness; or write off if the item has no recoverable value. The worst option is to do nothing — slow-moving stock tends to become no-moving stock, and eventually a write-off at a much larger impairment than an early discount would have cost.
Stop reordering slow movers automatically
Many businesses discover they are still automatically reordering items that have not sold in months, simply because those items are in their system with a standing reorder point. An ABC analysis will surface these. Remove slow-moving C items from automatic replenishment immediately and move to manual review before any future order.
Improve Demand Forecasting
Most excess inventory is not a procurement failure — it is a forecasting failure. Over-ordering happens when purchasing decisions are based on intuition, historical averages, or worst-case assumptions rather than on current demand signals. Better forecasting is the most structural fix available: it reduces both stockouts and overstock simultaneously.
Use actual sales data, not gut feel
If your reorder quantities are based on "what we usually order" rather than what your actual sales data shows you will sell in the next four to six weeks, you are almost certainly holding more stock than you need. Pull your sales history for each SKU, look at the actual weekly run rate, and use that to set your reorder quantities. The difference between intuition-based and data-based ordering is typically 15–30% of inventory value.
Adjust for seasonality explicitly
Many SMEs over-order in slow periods because they have not adjusted their reorder points to reflect seasonal demand patterns. If you sell 40% more of a product in Q4 than Q2, your safety stock and reorder triggers should reflect that — not a flat average across all periods. Explicit seasonality adjustment prevents both the excess inventory of quiet periods and the stockouts of busy ones.
Shorten your planning horizon
The longer your replenishment lead time, the more safety stock you need to hold to protect against demand uncertainty. Any reduction in supplier lead time — even from 8 weeks to 6 weeks — directly reduces the safety stock you need to carry. Renegotiating lead times with key suppliers is often overlooked as an inventory lever, but it is one of the most structurally impactful.
Rationalise Your SKU Count
SKU proliferation — the gradual accumulation of more and more product variants, sizes, colours, or configurations — is one of the most common causes of inflated inventory. Every additional SKU you hold requires its own safety stock, its own reorder management, and its own warehouse space. The collective working capital cost of maintaining a broad, underperforming product range is frequently underestimated.
Identify your 80/20
In almost every product range, roughly 20% of SKUs generate 80% of revenue. The remaining 80% of SKUs generate the other 20% — but consume a disproportionate share of your inventory investment, your management attention, and your storage capacity. Identifying which SKUs fall into each category is the foundation of any rationalisation effort.
Apply a clear elimination test
For any SKU you are considering eliminating, the test is simple: what is the annual revenue this SKU generates, what is the gross margin, and what would happen to that revenue if the SKU were removed? In most cases, customers buying a slow-moving variant will switch to a mainstream alternative — the revenue is retained; the inventory cost is eliminated. In the minority of cases where a SKU serves a genuinely unique customer need, it warrants retention. But the assumption should be rationalise, not retain.
Track DIO Monthly as a KPI
Everything above — ABC analysis, slow-mover action, better forecasting, SKU rationalisation — requires a consistent measurement discipline to sustain. Without a monthly DIO number, inventory improvements tend to erode quietly over time as old habits return and stock levels drift back upward.
Calculate your DIO at the end of every month. Track it on a dashboard alongside your DSO and DPO — the three components of your Cash Conversion Cycle. Set a target: for most SMEs with significant inventory, a 10–15 day DIO reduction over 12 months is achievable through operational changes alone, with no capital investment required.
If you have Power BI connected to your accounting or inventory management system, a live DIO dashboard that updates automatically is straightforward to build and eliminates the manual calculation step entirely. The metric becomes visible to anyone who needs to see it — purchasing, operations, finance — and that visibility alone changes behaviour. Buyers who can see the DIO impact of their ordering decisions make different decisions than those who cannot.
Key Takeaways
- DIO (Days Inventory Outstanding) measures how many days your stock sits before it is sold — a lower DIO means faster cash conversion
- Carrying costs for excess inventory typically run 20–35% of inventory value per year — the hidden cost is substantial
- A 10-day DIO reduction on €3M annual COGS releases approximately €82K in cash — permanently and without new revenue
- Start with ABC analysis: segment your inventory into A, B, and C items — most excess is found in C items, which are often 50% of SKUs but only 5–10% of sales value
- Any item in stock for more than 90 days without movement is a cash conversion opportunity — sell at a discount, return, or write off; don't let it drift further
- Most excess inventory is a forecasting failure, not a procurement one — data-based ordering typically reduces inventory 15–30% versus intuition-based ordering
- Track DIO monthly alongside DSO and DPO — what gets measured gets managed
Where to Start
Pull your inventory report today and sort every item by days on hand. Any item over 90 days deserves an immediate decision. That single action — looking at your stock through the lens of time rather than quantity — will almost certainly surface items where cash is sitting unnecessarily that can be recovered quickly.
From there, calculate your DIO and compare it to where it was six months ago. If it is rising, you have a structural issue — either demand is falling, ordering discipline has loosened, or both. If it is stable but high versus your industry, the opportunity is operational: better forecasting and SKU rationalisation will move it.
If you would like help calculating your DIO, running an ABC analysis, or building a dashboard to track your inventory position alongside your broader working capital metrics, book a free initial consultation.
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Book a Free ConsultationIvaylo has over 10 years of senior FP&A experience at Coca-Cola Europacific Partners, where he worked alongside supply chain teams managing inventory and working capital across multiple European markets. He founded Avi Finance to bring that expertise directly to SMEs across Europe.