What impact do higher inventory levels generally have on cash flow?

Higher inventory levels can negatively impact cash flow for several reasons. When a business holds large amounts of inventory, cash is tied up in that stock. This means that funds that could otherwise be used for operations, investments, or paying liabilities are instead locked away in unsold products. As inventory ages, it can also lead to increased costs related to storage, insurance, and potential obsolescence, further driving down cash flow.

Moreover, high inventory can indicate that a company is overstocked or not selling products as quickly as anticipated. This situation can lead to markdowns or discounts in order to clear out excess stock, which can further erode profit margins and negatively affect cash flow. Ultimately, effective inventory management is key to ensuring that cash remains available for other business needs, highlighting the importance of balancing inventory levels to maintain or improve cash flow.