It takes cash to buy inventory. Many small business owners even have an imaginary sign hanging in their office that reads "Game Over" when the checking account balance gets to zero.

Nevertheless, it is not unusual for toy retail specialists to simply view their inventory as merchandise that brings customers into the store and generates sales. Because they are so time-pressed, retailers don't always have the opportunity to monitor stock as often as they should. But this is a major oversight.

The following suggestions can help ensure that a retailer's inventory keeps cash flowing into—rather than out of—the business.

1. Computerize records. Now is the time to automate your inventory management system, if you haven't done so already. The cost for this step has dropped dramatically in recent years, as computer prices have fallen. A decent PC, loaded with all of the necessary hardware and software, can be acquired for as little as $5,000. An automated system will likely pay for itself in a year or less by making your business more efficient.

2. Track inventory turnover. A well-automated system now will greatly assist in calculating inventory turnovers. Total inventory turnover is stated either in number of turns per year or number of days of inventory on hand. The following computation is used to calculate the former:

Cost of Goods Sold/Inventory = Turns Per Year The calculation for the number of inventory days on hand is as follows:

Inventory/Cost of Goods Sold x 360 = Number of Days on Hand Here is an example:

Inventory=$1,000,000

COGS=$4,000,000

Number of Inventory Turns Per Year = $4,000,000/$1,000,000 = 4 turns

Number of Inventory Days on Hand = $1,000,000/$4,000,000 x 360 = 90 days

It doesn't really matter which method you use to track your inventory, but it is vital that you pick one and compute the number regularly. Next, compare this number with the historical averages of your own company and against industry averages.

As such, you will be alerted to positive and negative changes and can adjust your inventory accordingly.

For example, if your store currently had the above levels of inventory ($1,000,000) and COGS ($4,000,000), and your historical and industry averages were 60 days, you could adjust your inventory level down from 90 days to 60 days. This would positively impact your cash flow by $333,333 (30 days reduced/360 x $4,000,000).

Not only should you compute turnovers for your overall inventory level, but also by line and SKU. Doing this will enable you to make specific adjustments within your inventory components to ensure that you aren't overstocking pieces that are selling less frequently.

3. Find the balance for the "right" amount of inventory. Even for a business that tracks turnovers with an automated system, striking a balance between too much and too little inventory can be challenging. Your customers expect to find what they are looking for in your store. If you are out, lost sales will result. If this becomes the norm, you will eventually see that "Game Over" sign start to flicker.

On the other hand, if you maintain too much inventory, your customers might be happier...but your banker certainly won't. Excess inventory results in unnecessary interest costs and could cause inventory writedowns if the inventory in stock goes completely out of style.

The key is to keep up with the market by attending trade shows, reading industry publications and surveying your customers.

4. Refine your ordering system. Many retailers make the mistake of letting any employee order inventory. If you often find yourself opening shipments, only to find several items of which you already have a half dozen , then it is time to revise this process.

Authorize only one or two people in your business to order inventory. Make sure your designated personnel are armed with the latest automated inventory stock information as they are planning the next order.

Other suggestions for an effective ordering system include:

• Take volume discounts when it make sense, but don't over-order just to save a few dollars on items that turn slowly.
• Use just-in-time ordering.
• Shop your suppliers regularly.
• Ask for discounts.
• Ship back defective items promptly.

5. Get rid of 'dead' inventory. Many retailers feel they must carry a little bit of everything. There may be a couple of items that customers inquire about only a few times a year. But at least when they do, retailers can feel confident, knowing the inventory is there. While this may be good customer service, it is usually bad for cash flow.

Try this experiment: Make a point of staying in the store for a few evenings after closing one week and take inventory of the 'dead' merchandise. Mark this material down to some "have I got a deal for you" prices. When this product sells, don't replace it. Instead, put the extra money into your niche items that are able to turn a profit much faster.

Keep in mind that faster-turning inventory means faster-turning dollars, which translates to increased cash flow. And that can only mean a lot more sleep at night for you.

6. Understand cost-to-order vs. cost-to-keep. When analyzing cost-to-order, consider the following factors:

• the time it takes you and/or your employees to order inventory. Using the age old "time is money" theory, there is a direct correlation between the frequency of ordering and the cost to your business.
• the money (and possibly lost sales, which cost you even more) for the inspection and return of defective inventory shipments.
• the ancillary costs, such as transport and handling expense.
• An efficient ordering system will reduce costly express shipping costs and the cost of handling inventory.

Cost-to-keep refers to the funds needed to hold inventory. The direct costs associated with keeping inventory on hand include:

• Insurance premiums
• Rent or depreciation for the building
• Storage costs if some inventory is housed off-site
• Overhead related expenses (e.g., heating and air conditioning)
• Employee salaries and wages

When considering your investment in inventory, the actual cost of the inventory itself is only the beginning of the equation. The "soft" costs required to order and stock inventory are equally significant and must be held in check to ensure that your checkbook balance doesn't go to zero.

7. Be proactive, not reactive. Just because you sell a lot of a certain toy doesn't mean it should dominate your floor space. A thorough inventory cost analysis—one which calculates inventory turnover, cost-to-order and cost-to-keep—might just reveal that some of your most popular pieces are also your least profitable.

A reactive inventory manager may never realize this profit drain, particularly if he or she is overly focused on top line sales at the expense of bottom line profits. However, a proactive inventory manager can easily correct such a problem.

If your analysis reveals that you are selling a lot of items at or below breakeven, change the focus in your business.

• Redo your store layout. Allot more prominent display space to more profitable lines and items.
• Allocate more marketing dollars to your more profitable items.
• Raise prices on the inventory pieces that aren't pulling their weight. You'll be better off selling less of these items at a higher profit margin and re-allocating your inventory investment in more profitable lines.

8. Perform an annual physical inventory. No matter how solid your automated inventory management system, you still need to perform a physical inventory at least once a year. An automated system is only as useful as the inputted data. A physical inventory will verify the information's accuracy.

Besides, computers are not intuitive. Your PC cannot subjectively assess pending market changes, fickle customers or subtle store layout deficiencies—but you can.

A physical inventory will also will better equip you to make the right decisions that keep you a step ahead of your competitors.