Having a poorly managed inventory could cost you up to 11% of your annual revenue. That’s a significant amount of lost money you could use to expand your business.

But managing inventory can be difficult no matter a business’s size. It takes careful planning to hold the right amount of stock without overloading your warehouse or running out at the worst possible time. That balance is key to maintaining smooth operations and keeping costs under control.

In this article, we’ll explore why lowering your aggregate average inventory value is imperative and explain how to do so effectively without cutting into your revenue.

What is aggregate average inventory value?

Aggregate average inventory value is the total worth of all the products a business has in stock over a certain period. It helps companies see how much money is tied up in inventory before they sell those products.

To calculate this metric, businesses:

1. Track their inventory.
2. Add up the value of everything they have in stock at different points.
3. Divide the sum by a specific period of time.

This gives them a clearer picture of how much they invest in inventory over time. Here’s the equation to find aggregate average inventory value:

Aggregate Average Inventory Value = (Beginning Inventory Value + Ending Inventory Value) ÷ 2

This calculation helps businesses manage their inventory effectively, plan ahead, and prevent revenue losses from overstocking or running out of product. With a clear understanding of inventory value, brands can make smarter decisions, optimize cash flow, and maintain smooth operations.

Why lowering inventory value is important

Obviously, inventory management plays a huge role in business growth. It doesn’t just impact your bottom line — it also affects expansion opportunities. Keeping your inventory value in check therefore brings many benefits, which we’ve broken down below.

1. It maximizes warehouse space

Too much inventory takes up space in your storage area. When shelves are overcrowded, it’s harder to organize items, which then makes it difficult to find the products you need. This slows down your operations and can cause delays in readying orders for buyers.

Balanced inventory uses your warehouse space more efficiently. Everything stays organized so it’s easier and faster to pick, pack, and ship items. That, in turn, helps orders go out on time and keeps operations running seamlessly. Additionally, with nearly two-thirds of global online shoppers expecting to receive their items within 24 hours, efficient inventory management is a must to meet that demand.

2. It reduces holding costs

Extra inventory not only takes up space but also costs you money. Whether you own or rent a warehouse, if products don’t sell fast enough, they’ll sit and tie up cash that you could use elsewhere. On top of that, you also pay for storage, utilities, labor, and other expenses to keep items there.

That’s why keeping only what you need or what you know will sell helps you save. You cut down on storage costs as well as free up money to invest in areas that support your business growth.

3. It increases profits

As discussed above, when a business keeps the right amount of inventory, it has more cash available for important needs. Having extra cash also means the company is prepared for unexpected costs, like upgrading software or switching to better tools.

4. It minimizes waste

Too much inventory often ends up going to waste. According to a Bloomberg report, many U.S. retailers, especially those that sell clothes and home goods, struggled with excess stock in 2022. Even with these efforts though, brands still throw away a huge amount of unsold inventory. In fact, around 8% of surplus stock worldwide is discarded, adding up to about $163 billion in losses every year.

To cut down on that unnecessary dumping, businesses need to monitor their stock levels and reorder points strictly.

5. It improves cash flow

Cash flow is the money a business has on hand to cover everyday expenses like rent, employee salaries, utilities, and supplies. You need a stable supply to pay these costs on time, otherwise it can slow your operations.

By managing inventory wisely though, you can maintain a steady cash flow so you’ll always have enough money to keep functioning, pay your team, and plan for future growth without worrying about financial roadblocks.

6. It increases flexibility

What’s popular today might not be tomorrow. Demand and trends change constantly, often without warning. That’s why businesses need the ability to adapt quickly. So, if you have a clear overview of your inventory, you can adjust your strategy and products to stay relevant and meet shifting customer needs without missing a beat.

How to lower your aggregate average inventory value

If your aggregate average inventory value is too high, here are a few ways to lower it and keep your stock levels balanced.

1. Improve your demand forecasting

Markets constantly change, but businesses don’t have to be caught off guard with each fluctuation. The best way to stay ahead is through more precise demand forecasting. This means:

• Looking at past sales data
• Understanding customer buying habits
• Keeping up with industry trends

By staying on top of these factors, businesses can anticipate changes and pivot quickly, ensuring they always have the right products available when customers need them.

2. Adopt a Just-in-Time (JIT) inventory model

A JIT inventory model helps businesses streamline their inventory process by ordering and receiving stock only when it’s needed. It relies on strong coordination between all parts of your business, from suppliers and production to sales and fulfillment. Every step must be in sync to ensure products are available exactly when required. This approach reduces excess inventory, decreases storage costs, and drives efficient processes.

However, the model has its risks. Without an updated sales forecast, businesses might run into delays or stock shortages. Accurate demand planning and reliable supplier relationships are crucial for making this work effectively.

3. Optimize your supplier relationships

Strong relationships are a crucial part of a successful business, and when it comes to inventory, having reliable suppliers makes all the difference. A good supplier helps you:

• Obtain stock quickly
• Adjust order sizes when needed
• Negotiate better pricing

This kind of partnership gives your brand extra security. If demand suddenly changes or finances grow tight, you can adapt without major setbacks. That’s why developing trust and communication with your suppliers is as important as managing your inventory.

4. Employ dropshipping or a 3PL

As online shopping continues to grow, more businesses are looking for ways to manage inventory without the extra hassle or cost. According to Grand View Research, consumers are increasingly turning to eCommerce due to the convenience, making it easier for businesses to sell products without the high costs of stock management.

With dropshipping, you don’t have to keep products on hand. Instead, you partner with suppliers who store, pack, and ship orders directly to your customers. That means lower up-front costs and less risk, which makes it a great option if you want to start selling without spending big on inventory.

A 3PL (third-party logistics provider) works a little differently: Rather than handling storage and shipping yourself, you send your inventory to a provider, and they take care of the rest. This frees up time and resources so you can focus on growing your business.

5. Increase inventory turnover

When your inventory turnover is high, products sell fast instead of sitting in storage. If sales are slow though, there are ways to speed things up and keep stock moving:

• Adjust prices to make products more appealing and encourage sales quicker.
• Run promotions or discounts to clear out slow-moving stock.
• Bundle products together to move extra inventory while giving customers a better deal.

The faster you sell, the faster you see a return on investment. It also reduces the risk of overstocking and makes room for new products that shoppers want.

6. Implement automatic reordering

While JIT focuses on ordering inventory only when necessary, automatic reordering ensures you never run out of stock; the system triggers orders once inventory reaches a set level. However, also like JIT, this method comes with risks. Accurate forecasting is crucial for automatic reordering to be efficient and to avoid overordering or running out of stock.

7. Diversify fulfillment centers

Fulfillment centers are warehouses where businesses store their products before they’re packaged and shipped to buyers. Instead of doing everything yourself, a fulfillment center handles storage, packing, and shipping so you’re able to ship out orders faster.

Leveraging multiple fulfillment centers lets you keep stock closer to customers, which results in shorter shipment times and lower costs. It also helps distribute stock more efficiently, thereby preventing any location from overloading inventory.

Wrapping up — Improve your aggregate average inventory to see higher profits

Beyond keeping track of stock, managing inventory involves tightening your business so it runs smoothly and profitably. If handled poorly, hidden costs can pile up, hurting your cash flow, storage space, and ability to grow. That’s why understanding your aggregate average inventory value is so important — it gives you a clear picture of where to make smarter decisions without cutting into your revenue.

At MyFBAPrep, we help businesses like yours build scalable, flexible inventory strategies that keep up with changing demand. Whether you need better storage solutions, faster fulfillment, or expert inventory management, we have you covered.