It is also possible that a company's inventory will become less in demand, perhaps become obsolete, or even deteriorate. If that occurs some of the company's money will be lost. Having slow-moving items in inventory also uses valuable space and makes the warehouse less efficient.
I assume that the risk of holding inventory was the reason for the quick ratio (also known as the acid-test ratio). In this financial ratio, inventory is excluded from the current assets that will be compared to the company's current liabilities.
While inventory is critical for meeting customers' needs, having too much of the wrong inventory items can result in financial problems.
Learn Accounting: Gain unlimited access to our seminar videos, flashcards, visual tutorials, exams, business forms, and more when you upgrade to PRO.