Inventory problems rarely announce themselves as cash flow problems. At first, they usually look like small operational questions:
"Do we really have what the system says we have? Can we trust that number?"
Let's look at a common scenario:
Imagine the system says there are 100 units available.
The warehouse team isn't so sure.
Maybe receiving has been inconsistent. Maybe consumption wasn't posted correctly. Maybe the last cycle count raised more questions than it answered. Whatever the reason, someone decides it would be safer to order another 40.
Nothing has technically “failed.” The warehouse keeps moving. Customers still get orders. But cash that could be used somewhere else is now sitting on a shelf.
That's the connection between ERP inventory accuracy and cash flow that I've found executives sometimes underestimate.
With Microsoft Dynamics 365 Business Central, inventory transactions can be controlled and tracked throughout the operation.
But the ERP can only be as trustworthy as the processes feeding it. Receiving discipline, item setup, warehouse movements, consumption, scrap, and cycle counts all contribute to whether the number on the screen deserves confidence.
In the first article in this series, I talked about how ERP architecture choices eventually become financial consequences. Inventory gives us a very practical example of that principle.
When inventory truth becomes unreliable, people compensate. They build buffers, create workarounds, and make purchasing decisions based partly on data and partly on instinct.
Instinct has its place in business. Inventory valuation probably isn't it.
Inventory control most often breaks when the everyday processes that create inventory data aren't performed consistently.
That's an important distinction. When the quantity in the ERP is wrong, it's tempting to blame the system. But inventory accuracy is built one transaction at a time, and many of those transactions begin on the warehouse or production floor.
Receiving is a good example. A shipment arrives, everyone is busy, and the priority is understandably to get product off the dock and where it needs to go.
But if the receipt isn't recorded accurately, the wrong quantity is entered, or product ends up in a different bin than the system expects, the inventory record can already be wrong before the product leaves receiving.
The same thing can happen at the other end of the process. Materials get consumed but aren't posted correctly. Scrap occurs without being recorded. An item is moved from one location or bin to another physically, but the transaction doesn't follow it.
Each of these can look like a small operational issue at the time. And that's part of the problem.
Microsoft's guidance on counting and adjusting inventory in Business Central explains how physical inventory counts can be used to reconcile actual quantities with what's recorded in the system, including the use of cycle counting to count selected items more frequently.
That's useful functionality, but I don't view cycle counting as a substitute for transaction discipline. If you're constantly correcting inventory without understanding why it became inaccurate, you're measuring the symptom instead of fixing the process.
Master data adds another layer. Item setup, units of measure, replenishment parameters, bills of material, and other underlying data affect how inventory moves through the business.
A single, small setup problem can repeat itself across hundreds or thousands of transactions before someone even realizes there's a pattern.
That's why I pay attention to whether cycle counts are identifying isolated discrepancies or repeatedly uncovering the same types of errors. The latter is telling you something.
ERP forecasting accuracy depends on the same foundation. If the inventory balance isn't trustworthy, the assumptions built on top of it won't be either.
The ERP hasn't necessarily lost control of inventory. More often, the processes feeding the ERP have lost enough consistency that the number on the screen no longer tells the whole story.
And once people stop trusting that number, they start making decisions around it: They order a little extra, hold a little more safety stock, expedite what they aren't sure they'll have. They build buffers against uncertainty.
Notice that none of those decisions looks especially costly on its own. But together? They turn an inventory-control problem into a working-capital problem.
ERP inventory accuracy and cash flow are connected because every dollar tied up in inventory is a dollar the business can't use somewhere else.
Go back to those 100 units from the beginning. The system says they're available, but the warehouse doesn't completely trust the number, so someone orders another 40.
That decision may be perfectly rational given the information available. Nobody wants to explain to a customer that an order can't ship because the inventory that appeared to be available wasn't actually there.
But now the company has used cash to protect itself from uncertainty in its own data.
Multiply that behavior across hundreds or thousands of items, and the financial impact changes quickly.
This is where ERP safety stock management deserves a little nuance. Carrying additional inventory isn't inherently a problem. Companies use safety stock deliberately to manage demand variability, supplier lead times, and disruption risk.
The problem is carrying inventory because you don't trust the processes creating your inventory numbers.
PwC's 2025 Working Capital Study makes the broader connection between working-capital performance and better inventory planning, including forecasting, replenishment strategies, lead-time reduction, and appropriate safety-stock levels. That's the discipline we're after.
When inventory data is unreliable, those decisions become harder. Purchasing may order earlier or buy more. Operations may protect itself with larger buffers. Slow-moving inventory can remain on the shelf while more product arrives.
Eventually, cash that could have funded equipment, hiring, debt reduction, or growth is sitting in inventory the business may not have needed.
The chain reaction is pretty simple:
Poor inventory accuracy → larger buffers → more cash tied up → less financial flexibility.
This is why I don't view inventory accuracy as a warehouse KPI that belongs exclusively to operations. It's part of working-capital management.
A CFO doesn't need to know which bin an item belongs in.
But the CFO absolutely needs to know whether the business is financing inventory because customers need it — or because nobody quite trusts the number on the screen.
Inventory errors affect financial performance through excess working capital, write-offs, margin pressure, and the additional costs created when the business has to compensate for unreliable inventory data.
As a CFO, I pay attention to inventory turnover and ERP data together, along with days inventory outstanding (DIO), because they help answer a basic question: How efficiently are we turning the cash invested in inventory back into cash we can use?
If inventory accuracy is weak, those metrics can start telling an uncomfortable story.
Excess inventory increases DIO and ties up working capital. Inventory that sits too long can become obsolete or require a write-down.
At the other extreme, believing you have inventory that isn't actually available can lead to shortages, delayed fulfillment, expedited freight, and other recovery costs that put pressure on margin.
Deloitte's 2025 Working Capital Roundup reinforces why CFOs should pay attention to this connection. Its analysis of more than 2,300 companies found that reductions in DIO helped improve cash-conversion performance, while stronger forecasting and more deliberate inventory practices can support sustainable working-capital improvement.
There's also a customer side to this equation. If inaccurate availability causes an order to ship late or only partially, invoicing may be delayed along with it. That can extend the time between taking an order and ultimately collecting the cash.
I wouldn't blame every DSO problem on inventory (finance people tend to get suspicious when you blame one metric for everything), but fulfillment performance certainly affects how quickly an order can become a collectible receivable.
Then there are the costs that don't arrive conveniently labeled “inventory accuracy problem.”
Extra warehouse labor spent searching for product. Emergency purchases. Premium freight. Repeated recounts. Time spent reconciling discrepancies. Inventory buffers added because the planning team doesn't trust availability.
Individually, those expenses can disappear into normal operating costs. Collectively, they can reduce margin and make cash flow less predictable.
That's why the CFO's job should go beyond simply monitoring the inventory number on the balance sheet. The more useful question is whether the operating processes behind that number are producing information the business can trust.
Because when inventory data is unreliable, the financial statements eventually get the bill.
You can trust your inventory data only when you can trust the processes that create it.
That may sound obvious, but it's easy to spend a lot of time trying to improve ERP inventory accuracy and cash flow without asking whether the underlying operating discipline is consistent.
I'd start with four questions:
There's also an important distinction between carrying inventory intentionally and carrying it because you're uncertain. McKinsey's Global Supply Chain Leader Survey shows that companies use inventory buffers as one strategy for managing supply-chain disruption.
That's a legitimate business decision.
What I'm concerned about is the buffer nobody deliberately chose: extra inventory purchased because planners don't trust availability, because fulfillment has been inconsistent, or because the business has learned to protect itself from its own data.
That's why my practical rule is simple:
If inventory truth is unreliable, working capital discipline is impossible.
The goal isn't perfect inventory (I'm not sure I've come across a warehouse that would make that promise with a straight face).
The goal is inventory information that's reliable enough for people to make financial and operational decisions without routinely adding a cushion “just in case.”
Inventory accuracy is easy to treat as an operational metric. But when you follow the consequences far enough, it becomes something much bigger.
Reliable inventory helps purchasing make better decisions. It gives operations confidence in what they can promise and ship. It allows finance to manage working capital with better information. And it reduces the need for all those little buffers businesses create when they're not quite sure what to believe.
That's why ERP inventory accuracy and cash flow shouldn't be separate conversations.
The objective isn't to squeeze every possible dollar out of inventory or eliminate safety stock. It's to know why you're carrying what you're carrying.
There's a big difference between inventory held deliberately to support customer demand or manage supply risk, and inventory held because nobody trusts the system enough to operate without a cushion.
For a CFO, that distinction matters. Cash tied up intentionally is a business decision. Cash tied up because of unreliable processes is a cost of poor control.
And that brings us back to the larger point of this series:
ERP decisions eventually become financial decisions.
Sometimes the path runs through architecture. Sometimes it runs through a warehouse aisle.
In the final article in this series, I'll look at what happens when those seemingly small ERP decisions become permanent operating habits, and why the financial cost can continue long after the original decision has been forgotten.
If you're questioning whether your inventory processes are giving you the financial control they should, let's talk. Sometimes the best place to start isn't with another report or another configuration change. It's figuring out where inventory truth is breaking down and why.