Holding too much inventory can tie up cash. Holding too little risks stockouts and lost sales, especially amid rising supply chain volatility. For growing businesses, striking the right balance is what matters.

Inventory turnover is one of the clearest signals of how well you’re managing that trade-off. Garrett Judge, Sales and Solutions Director in Structured Working Capital at J.P. Morgan, explains what inventory turnover measures and why many businesses are carrying more inventory than usual. He also offers two approaches to help improve turnover and free up working capital.

What is inventory turnover?

Inventory turnover measures how many times you sell and replace your stock over a given period—typically a year. It’s an indicator of how efficiently your business turns goods on hand into revenue.

A high turnover ratio generally means you’re selling through stock quickly and managing working capital well. A low ratio can signal that goods are moving too slowly, tying up cash that could otherwise fund growth, pay down debt or cover other operating needs.

For midsize businesses, inventory turnover is closely tied to cash flow. Stock sitting in a warehouse is cash that isn't working a different job—a missed opportunity to reinvest, an added carrying cost and an exposure to a demand shift before those goods move.

What causes excess inventory, and why it happens now

Excess inventory—sometimes called overage inventory, or distressed inventory when it has lost value—is stock that has outpaced demand. An unexpected increase can signal flaws in forecasting. But businesses are also intentionally building up inventory as they rethink supply chain risk.

“Supply chain volatility is the No. 1 reason clients come to us,” Judge said. The disruptions that came out of COVID exposed how fragile lean, just-in-time supply chains really were—and the shocks keep coming. Geopolitical tension, conflict in key trade regions and the evolving tariffs are among the pressures pushing companies to rethink how much inventory they keep on hand.

Tariffs in particular are changing near-term buying behavior. “You’ll see companies pulling orders forward to minimize pricing impacts,” Judge said. “But what that means is now they’re carrying elevated levels of inventory that they may not have planned for.”

That shift is changing who’s involved in the discussion. Treasury teams are talking with procurement more regularly as businesses balance the impact of inventory decisions on supply chain resilience and working capital. “That conversation is where we can share insights on inventory management and working capital strategies,” Judge said.

Best practices for managing inventory turnover

Strategies for improving inventory turnover fall into two main categories:

1. Reducing excess inventory:
Sharper demand forecasting, shorter replenishment lead times and trimming SKUs that rarely sell can all help improve turnover. Small improvements in each can add up to a leaner inventory position and greater efficiency. However, leaner can have limits. “The world had been built along this idea that everything was going to be delivered right when it’s needed in the next manufacturing step,” Judge said. “That’s proven to be overly fragile.” Some companies are shifting from just-in-time to just-in-case inventory models, which may involve holding additional buffer stock to manage supply chain disruptions.

2. Moving inventory off-balance sheet:
Rather than holding safety stock, some businesses choose to engage third parties to fund and own inventory until it’s needed. Because your turnover ratio reflects only inventory you actually hold, stock sitting with a third party doesn't weigh down your ratio—or your balance sheet. Third-party inventory ownership may provide opportunities to manage working capital and support customer requirements, depending on the business’s circumstances. But the structure isn’t the right fit for every business—it requires scale and weighing potential returns on freed-up capital against setup and operating costs.

Key considerations behind third-party ownership

Designed for resilience, third-party ownership structures aren’t a fit for every business. “A commercial rationale is typically required for entering such transactions. They are not intended solely for reducing balance sheet inventory,” Judge said.

Whether you’re building inventory for your own operations or holding it on behalf of a client, there are many factors that can help businesses determine where this structure makes sense:

• Structure: Three parties are typically involved: a business looking to hold more inventory than its balance sheet can support, its bank and a third-party trading company. Rather than holding inventory directly, the bank lends the trading company funds to purchase inventory for the business. The trading company assumes ownership and makes stock available when the business is ready to draw on it.
• Sizing: Programs typically start around $75 million and can scale from there, assuming a company has sufficient credit capacity. If a company’s client is the end inventory buyer, cost and capacity are based on that client’s credit strength. A financially strong end-buyer could open up additional capacity beyond what the company could support on its own.
• Timeline: Setup timelines vary, with larger programs often requiring additional time. Engaging accounting, procurement and tax teams early may facilitate the process.
• Cost vs. benefit: This approach typically carries a higher cost than traditional on-balance-sheet financing. Weigh that premium against the return on freed-up working capital and the value of preserving borrowing capacity.
• Tax exposure: Inventory can be taxed differently depending on where it’s held and its path through the supply chain. Consider tax implications when exploring third-party inventory ownership solutions. 
• Operational readiness: Strong reporting matters, whether a business tracks the inventory itself or relies on a partner who does. Lenders often require data audits, site visits and regular updates. Physical controls, such as separate storage, as well as proof of insurance and handling records, are also commonly considered.