Inventory Turnover: Overview, Formula, and Strategies

Proactive strategies, like accurate forecasts, supplier collaboration, ABC classification, and stock audits can cut the obsolete stock risk. Businesses may claim a charitable contribution deduction, calculated as the lesser of the inventory’s fair market value or its cost basis, with potential enhancements for C corporations under specific IRS provisions. For instance, a company donating $10,000 worth of inventory with a $6,000 cost basis may be able to deduct $8,000. Proper documentation, such as written acknowledgments from recipient organizations, is required to comply with tax laws. Oftentimes, technological innovations make products outdated or undesirable, because they don’t offer the latest features or design capabilities.

• From identifying outdated stock to leveraging technology, every step you take makes a difference.
• For instance, if you don’t have any insight into what items are slow-moving and taking up storage space, then it will be harder to identify how much obsolete inventory you’re accumulating.
• Be aware of the tax implications and consider the financial impact on your business before making this decision.
• Inventory account accuracy is important to ensure the optimal stock level to fulfill customer demand, without wasting resources on excess inventory that might eventually become obsolete inventory.
• Liquidation or recycling may result in taxable gains or losses, depending on the proceeds.
• Netstock’s Excess Redistribution feature allowed RWB to reallocate stock strategically, driving additional sales and reducing waste.
• It ties up capital, takes up storage space, accumulates overhead costs, increases administrative load, and more.

Review the Prior Obsolete Inventory Report

Inventory account accuracy is important to ensure the optimal stock level to fulfill customer demand, without wasting resources on excess inventory that might eventually become obsolete inventory. Obsolete inventory is any inventory that a company can no longer sell or use due to lack of demand. This mostly occurs when goods reach the end of their product life cycle or in cases of sudden sales disruptions or demand forecasting mistakes. Obsolescence can also result from poor inventory management, such as when inventory items are forgotten, damaged, or expire before they’re sold or used. Inventory management software is a manufacturer’s or distributor’s best bet at reducing the risk of inventory obsolescence.

• Ecommerce merchants can now leverage ShipBob’s WMS (the same one that powers ShipBob’s global fulfillment network) to streamline in-house inventory management and fulfillment.
• While the annual review is required for accounting compliance, the quarterly review can help management identify ordering issues that increase the chance of products becoming obsolete.
• His career includes public company auditing and work with the campus recruiting team for his alma mater.
• Obsolete inventory takes up space in the warehouse and counts as an expense on the balance sheet.
• By taking a look at historical data, you can predict future demand for each SKU and make informed decisions to avoid purchasing too much of an item that might become obsolete faster than it can be sold.

Leveraging Inventory Management for Seasonal Trends

Start by calculating your average inventory using your inventory volume at the beginning of your desired time period and your volume at the end. Not only does this affect short-term liquidity, but it also weakens your ability to invest in new opportunities or HVAC Bookkeeping cover unexpected costs. Roger received his accounting degree from the University of Illinois and an MBA from Pepperdine University. Whatever system you rely on proper maintenance of data to ensure the validity of the analysis will be required. To learn more about how ShipBob can help you optimize your supply chain, click the button below to start the conversation.

Changes in Customer Demand

Buy one, get one free promotions or bundled discounts can also be effective ways to move excess inventory while cash flow boosting overall sales. You can sell them at a discount, bundle them with other products, liquidate them through surplus resellers, try to remarket them to a different audience, or do a complete inventory write off. Slow-moving items and dead stock can take up valuable storage space that could be used to store a higher volume of faster-selling products.

Flowspace vs. ShipBob: Which Fulfillment Partner is Right for You?

• If the products still have potential, you could also sell them at a discount by running a promotion, such as a flash sale.
• Consumer demand may decline because the product is poorly made, irrelevant, untimely, or already saturated in the market.
• Inventory that cannot be sold or used ties up capital and may adversely affect key financial metrics such as the inventory turnover ratio.
• Even if the forecasts are balanced, poorly managed procurement often fails to align purchasing decisions with actual market demand.
• Flowspace offers industry-leading fulfillment solutions and ecommerce software that powers insights and efficiencies for merchants selling online and ensures effective inventory tracking.
• Capable inventory management software is your best tool for increasing stock control and thus avoiding both issues.

Capable inventory management software is your best tool for increasing stock control and thus avoiding both issues. In this post, we look at obsolete inventory – how to prevent it and what to do when it happens. A higher turnover ratio generally means you’re effectively selling and replenishing your inventory. If you’re having trouble meeting customer demand, you may need to shift your inventory management strategy to avoid stock-outs and back orders. Companies can avoid obsolete inventory by improving forecasting techniques, using a more adequate inventory management system, making smart purchasing decisions, and accurately predicting lead times.

Company

Reporting obsolete inventory on financial statements requires adherence to accounting standards like the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Under these frameworks, inventory must be reported at the lower of cost or net realizable value, necessitating adjustments for obsolescence. Modern supply chain technology uses artificial intelligence and machine learning to analyze historical data and make better predictions. These platforms use your previous sales information, industry data, and other sources to detect customer behavior patterns that can improve your forecasting.

Managing obsolete inventory: How to identify and avoid it

A business may purchase too much of a product due to poor company forecasting, an inefficient inventory management system, or inaccurate lead times. Without efficient inventory and supply chain management practices in place, businesses can lose track of product lifecycles. This can lead to older stock being overlooked and becoming obsolete as newer stock takes precedence. Real-time access to data across the supply chain is beneficial for real-time inventory management. This gives you the most current information about inventory levels along with other details, such as warehouse receiving and production time lines.