Examine the balance sheet of most retail or manufacturing businesses, and near the top of the asset list you are going to find inventory.  Raw materials, supplies, work in progress, and finished goods are all included in an accountant’s definition of inventory.  This includes merchandise that managers expect to sell in the normal course of business, it’s the stuff sitting on shelves, parked in the lot, or being produced in the factory.  Purchasing, storing, handling and insuring that stuff is costly.  Inventory is a high-value asset and often represents a significant risk so in order to maintain profitability, lessening that risk is crucial.
Consider the following in order to reduce inventory risk in your business:
Too many or too few goods – When you want to make sure you don’t overbuy from vendors or underestimate the needs of your customers nothing beats a comprehensive and consistently applied inventory tracking system.  Some of the best information systems will forecast demand with reasonable precision and capture detailed sales histories.  Regular conversations with customers can influence your inventory purchase decisions as they may help to identify dissatisfaction with existing products or an increasing demand.
Obsolescence – Over time most inventory declines in value.  A manager should track revenue data and regularly move inventory via special promotions, discounting, and sales in order to lessen the risk.  Outdated merchandise drains profits as you are paying to hold and insure the items.  Find creative ways to move the items that are already on your shelves and make room for fresh inventory.
Damage – The causes behind frequent damage should be identified by managers.  Maybe more stringent policies need to be set or employees need better training in handling goods.  Limiting the number of boxes that can be stacked on pallets is an example of a strict policy that some retailers put in place.  It is possible that a change in supplier is in order or maybe the company’s packaging is not sturdy enough.  The first step to reducing the risk is to know why your inventory is being damaged.
Theft – Whether merchandise is housed in the store or a warehouse, establishing physical safeguards – locks, lighting, fences, cameras and the like – can help protect it.  You can also reduce fraud risk by taking time to perform thorough background checks on employees.  Another good preventative control that can sometimes uncover theft is hiring an independent auditor to review inventory levels.  Employees are less likely to shuffle goods from the warehouse to their homes or engage in “creative” accounting if they know that management routinely checks the company books and counts inventory.