The "Asset Rich, Cash Poor" Paradox

The 38% Benchmark

According to Netstock's 2024 Inventory Management Benchmark Report, which analyzed data from over 2,400 small and mid-sized businesses worldwide, the average company is holding 38% excess inventory: stock held strictly above demand requirements.

For larger SMBs, that figure climbs to 44%.

The same report found that nearly 80% of SMBs struggle with slow-moving inventory due to a combination of insufficient forward planning and overstocking, a pattern that emerged during post-pandemic supply uncertainty and has proven difficult to shake.

The "Silent Burn" of Carrying Costs

While inventory appears as an asset on the balance sheet, it behaves like a liability until it's sold.

Industry benchmarks consistently place annual inventory carrying costs between 20% and 30% of inventory value. A 2025 analysis by Cart.com found the average carrying cost across industries at 25.6%. This composite metric includes:

• 1.
  Cost of Capital: With interest rates elevated, funding inventory on a line of credit is immediately expensive. The Visa 2024-2025 Working Capital Index found that 84% of mid-market companies faced cash flow gaps at least once in the past year.
• 2.
  Storage & Handling: Warehousing space, labor, insurance, and equipment.
• 3.
  Obsolescence: The inevitable degradation of value over time. As PackageX noted in 2025, U.S. business inventories reached $2.58 trillion by March, marking a 2.5% year-over-year increase, indicating slower turnover and heightened obsolescence risk.

Why Does This Persist?

The question isn't whether excess exists (it clearly does). The question is why it persists despite the best efforts of operational teams.

A May 2025 case study from Crowe examining a global manufacturer identified four root causes that apply broadly across the mid-market:

1. Inadequate forecasting and S&OP processes: Planning cycles that don't keep pace with demand shifts
2. Poorly defined stocking strategies: Treating all SKUs the same rather than differentiating by value and velocity
3. Inaccurate or missing ERP inventory parameters: Static reorder points and safety stock levels that haven't been updated
4. No product lifecycle management guidelines: Slow-moving items that never get flagged for liquidation

The Netstock data supports this: 72% of SMBs report unpredictable lead times from suppliers, yet most ERP systems still rely on static averages to calculate reorder points. When reality fluctuates (supplier lead times shift, demand softens), static parameters fail to adapt. The system keeps ordering based on last year's logic.

Surgical Precision vs. Indiscriminate Cutting

The challenge for financial leaders is releasing trapped cash without threatening service levels. Indiscriminately slashing purchasing budgets typically leads to stockouts of high-velocity items that actually drive revenue.

What the market data supports is a move toward ABC/XYZ segmentation, a methodology that separates the "muscle" from the "fat" by classifying inventory on two dimensions:

• ABC (Value Contribution): A-items represent the top 70-80% of revenue; C-items contribute just 5-10%
• XYZ (Demand Predictability): X-items have stable, predictable demand; Z-items are erratic and hard to forecast

When combined, this creates a 9-cell matrix that enables differentiated strategies:

According to a CADDi procurement analysis, an electronics manufacturer implementing ABC/XYZ segmentation achieved a 20% reduction in inventory costs and 15% improvement in order fulfillment within the first year.

The Path Forward

KPMG's 2025 working capital guidance recommends using "the 9-box inventory segmentation model and SKU rationalization" as a core strategy for 2025 and beyond. McKinsey's research suggests that companies making targeted changes to their cash conversion cycle can "optimize their accounts payable and receivable balance by 30 percent or more in a matter of weeks."

The Crowe case study demonstrated what's possible: $10M+ in inventory reduction, $2M in working capital improvement, and improved on-time delivery to customers, achieved not through across-the-board cuts, but through focused work on stocking strategies, procurement parameters, and lifecycle management.

For mid-market manufacturers and distributors, the "asset rich, cash poor" paradox isn't inevitable. The data shows both the scale of the problem and the path to solving it.