Which issue can arise from high inventory levels?

High inventory levels can lead to cash flow shortages for several reasons. When a business holds a large amount of inventory, significant capital is tied up in that stock, which could otherwise be utilized for other operational needs such as paying bills, investing in new products, or marketing efforts. If inventory is not selling quickly enough, it can cause delays in receiving cash from sales, ultimately leading to a situation where a business struggles to meet its financial obligations.

Additionally, high inventory often comes with increased storage costs, including warehousing, insurance, and potential markdowns on unsold products. This situation can create a strain on cash flow, making it difficult for the business to maintain a healthy financial position.

In contrast, increased employee satisfaction, higher gross profits, and enhanced product diversity are generally linked to effective inventory management rather than high inventory levels. High stock levels can obfuscate the clarity needed for decision-making about employee performance and profitability, while diverse product offerings depend more on strategic planning than simply having large amounts of stock. Therefore, cash flow shortages are a direct consequence of excessive inventory, making this the correct assessment of the issue presented.