Category: Excess and obsolete inventory calculation

The reason for this is that overlooking may lead to a number of challenges for a business. Such challenges vary from missed sales, high inventory carrying cost, warehouse space issues, poor customer delivery, The higher the RPN, the more important is the risk and the The goal of my keynotes is to motivate through inspiration and stories of transformation, with liberal doses of education. This Excess and Obsolete Inventory Policy provides guidance for shrinkage, obsolescence and excess inventory in the inventory allowance accounts on their ledgers.

Whether the decrease in value is due to damage, deterioration, obsolescence, changes in price levels, future demand, or any other cause, the difference should be recognized by a charge to income in the period the decrease occurred. This Excess and Obsolete Inventory Policy provides a guide to manage this. This Excess and Obsolete Inventory Policy Guide help you proactively identifying, accounting for and resolving the disposition of excess and obsolete inventory. Also to assign the proper accountability for continuous improvement activities focused on reducing the occurrence of excess and obsolete inventory by identifying and addressing the related root causes.

The scope of Excess and Obsolete Inventory Policy spread over all company inventory items. Such inventory items include. The policy 12 pages with the word count.

From a materials management perspective, the current practices for identifying and reserving for excess and obsolete inventory are reactive with respect to identifying the true inventory activity profile, this policy helps you to be more proactive and can become instrumental in reducing Excess and Obsolete Inventory for your business.

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More about me — or — pick my brain.This is a representation of overbuying, orders that have been canceled, late deliveries or even projections that are inaccurate. The excess inventory can be as a result of a disruption in the cycle of a product. Disruptions can be caused by technical challenges, shipment delays or other factors like quality of the product. When calculating the excess stock in my shop, I have first to calculate the expected stock and the average number of daily stocks.

The longer the holding of excess stockthe more value it loses. When I put the excess stock in shelves, then I notice that the new items no longer have enough space to be displayed on.

This limits the products that could have had a higher margin on the shop.

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Costs like taxes, insurance, and warehousing also get incurred yet the stock is not making money to pay for them. The rate of turnover is used as a measurement of how good or bad the business is doing. It helps me compare my business with the other same businesses or even with the average measures. Carefully reviewing inventory and infrequent periods helps me know the items that are increasing cash flow, reducing it or adding unnecessary costing. Taking the opening inventory and closing inventory and dividing them to arrive with average inventory.

I pay attention to the number of items left on shelves before ordering a shipment. The number of items should be less or in very high demand. When this is not the case, then my shop is due to experience excess inventory.

This could result in losses for the shop, lack of space or even drag back the entire shop. Sometimes the problem is not the product but how merchandise is being positioned and marketed. I add on my Merchandising efforts to slow-moving goods. Displays are refreshed or rearranged. The attitude of the staff is also refreshed. This tactic is applicable where remarketing does not work.

It involves reducing percentages by a margin. When applying this I can use flash sales which make customers be in a hurry to buy items on discounts. Sometimes I also create an event where a crowd can come to the shop and see the products and purchase them too. This tactic is what I use in the low-priced items sector. This is where I make a giveaway post on my website for customers to see. This is through asking them to sign up in our email list or giving feedback on social media sites.

Keeping of excess products on the shelves with the hope of them selling at full price could lead to losses that were not foreseen.Share 6 Tweet Share Obsolete inventory is a problem that many businesses struggle to solve.

Obsolete inventory is the worst kind of inventory you can have next to no inventory, of course. Most businesses determine that its inventory is obsolete once there are no sales after a set amount of time.

Obsolete Inventory

Read on to discover the bad practices you might have engaged in that contributed to your obsolete stock. Inaccurate or incorrect forecasting of customer demand can cause you to order more stock than you need — leaving you with obsolete inventory after selling only a portion of what you stocked.

Offering a high-quality product should be an obvious step for reducing obsolete inventory, but plenty of retailers, wholesalers, and manufacturers sell shoddy products.

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The result was that Microsoft had a massive store of unsold Zunes that they had to simply write-off as a loss. Worse, you might believe that sometime in the future there will be a new surge in consumer demand and your obsolete inventory will vanish. Both of these strategies will only increase the amount of dead stock you accumulate. If you have obsolete inventory, the best thing to do is deal with it right away. Read on to find out how. Obsolete inventory will continue to hurt your business the longer it sits in your warehouse.

Here are a few ways to get rid of it:. Companies often charge obsolete inventory to their cost of goods sold at the end of the year — taking the loss and moving forward. Internal Revenue Code. The IRS Code says that regular C corporations may deduct the cost of the inventory donated, plus half the difference between cost and fair market value. Switch up the shelf arrangements. Freshen your displays. Try selling your items on different social networks.

One thing to keep in mind is to refrain from holding sales events too often. This will train customers to wait for a sale instead of buying at your preferred price. If your customers refuse to buy your obsolete inventory, no matter how much you market, discount, and bundle it, then you can always sell your excess stock to liquidation organizations. These are businesses that will buy your products at the lowest minimum price to help you free up warehouse space and capital.

excess and obsolete inventory calculation

The same tool we mentioned above that tracks inventory levels in real-time — cloud-based inventory management software. If you want to prevent obsolete inventory from raising your costs and cluttering your warehouse, we can help. Through accurate forecasting reports, you can predict when sales will rise, dip, and plateau. Book a Call Login Register.When inventory starts gathering dust in the warehouse, it may be time to write it off.

Inventory management can be a tricky part of owning a business, and eventually everyone makes a mistake and miscalculates customer demand. When that happens, the company has to account for the lost value represented by inventory that must be sold at a loss or discarded. How that accounting takes place depends on whether it has any residual value or has to be written off entirely. A company may have to take a write-down if it anticipates needing to reduce the price to move it off the shelves, since generally accepted accounting principles require companies to indicate the difference when inventory declines below cost.

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This requires a journal entry debiting the amount of inventory and crediting that same amount to a category such as "inventory write-down" on the income statement.

Obsolete inventory gets written off under GAAP as well, in a similar manner to excess inventory. A business first has to figure out if the inventory has any value.

excess and obsolete inventory calculation

For example, if a grocery store has milk become obsolete via spoilage, it has to be disposed of and thrown out. Other inventory has disposal value and can be sold at a loss. In that case, the accounting method would subtract the disposal value from the book value, take that amount as a debit on inventory and credit inventory write-off.

Timing can be critical in determining when to account for excess and obsolete inventory, so establishing a standard time schedule or accounting procedure for doing so is critical. Without this, your business can see results affected by those with their own motivations. A store manager, for example, can accelerate or delay recognizing losses to hit his sales numbers.

excess and obsolete inventory calculation

Someone more senior may be more focused on calculating the inventory losses piecemeal rather than taking a single, larger loss that would impact quarterly revenues. Going a long time between inventory inspections can result in large write-offs hitting the books at random times, making it difficult to project future earnings.

A business may take a write-off or write-down in one period, only to wind up booking revenue for those items the next. If a company uses techniques like online auctions to dispose of excess products, for example, it may earn more revenue than originally projected via liquidation.

In that case, a business would show higher sales figures in the subsequent quarter, crediting inventory and debiting the inventory write-off entry. Skip to main content.

Timing Impact Timing can be critical in determining when to account for excess and obsolete inventory, so establishing a standard time schedule or accounting procedure for doing so is critical.

Accessed 18 April Berman, Craig. Small Business - Chron. Note: Depending on which text editor you're pasting into, you might have to add the italics to the site name.Quite often, even among well-run businesses, the actual costs of inventory are inaccurate, underestimated and incomplete.

While most resellers know they have dead inventory, many are unaware of just how much. While that is huge and alone could have devastating ramifications for a business, how does one calculate the real costs to determine the hit that your business is facing?

The easy answer is to take the unit cost for those dead items, add them up and you have your answer. But not so fast. There are many other hidden costs to consider before determining the true cost of your dead inventory. Ignorance about these costs of dead inventory place your business in peril. And addressing the dead inventory problem can breathe life back into a troubled situation.

How to Calculate Excess Inventory

So what are some of the other very real costs that complete a more accurate calculation of dead inventory costs? To sustain an adequate inventory level, businesses sometimes must borrow money. Be sure to consider the cost of borrowing as an additional cost. And the longer one holds dead stock, the longer one is paying interest for the ability to have bought this stock. And remember this fact: Capital tied-down in dead inventory causes your business to lose profits. You have invested money into merchandise inventory with one purpose; to earn profits.

All profits earned as a result of this investment of capital is known as working capital or a return on investment. Cash tied-up in non-selling inventory is what we call non-working capital! Your investment should be working to bring profits which can be re-invested to buy fast-moving stock that will generate even more profits.

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In addition to the significant financial and opportunity costs of capital tied-up in inventory, insurance on the inventory is a substantial additional expense. In resell businesses, carrying excessive inventory may lead to higher finance fees and insurance premiums. Companies often buy goods on account from suppliers. The longer you hold dead stock without liquidating it or clearing it out for new stuff, the more interest you accrue on the debt obligation. Resellers also commonly pay insurance premiums based on the value of inventory held in stores.

If you store excess inventory, your premiums may increase.Need our help or just want to talk?

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The Value of Excess and Obsolete Inventory. One of the issues that can affect the valuation of a distribution business is the amount of inventory on hand that is classified as excess and obsolete. This could also affect the viability of an acquisition that you may be considering to take your business to the next level. Banks look at inventory carefully when considering working capital lending both to on-going businesses and for leveraged acquisitions.

Since the excess inventory is usually stored in the back of the warehouse, in the highest rack locations, or worst case, in an outside rented warehouse, most companies do not address the problem on a regular basis. Here is a 5 step process to Dispose of the excess and obsolete material that you currently have on hand. We have also included, after these steps, three suggestions related to Prevention. Here are 3 common situations that lead to the creation of excess and obsolete inventory.

There are others, but understanding and controlling these will usually help:. Note that all of these are based on good intentions, and may be critical to your business. Measurement of these situations is what is usually lacking, i. Force yourself to look at the C's and D's on the bottom of the list at least once a quarter and take action.

Finally, if inventory write-offs and outside warehousing are continuous problems, you may want to consider assigning the disposition and prevention responsibility to a specific person. We have done this with several clients and the pay-off is always good. It is rarely a job anyone wants long term, so they have the incentive to work on the issue aggressively. The Distributor Board has helped many companies with inventory issues. If you have any questions about anything mentioned in this newsletter, give us a call.

The Value of Excess and Obsolete Inventory One of the issues that can affect the valuation of a distribution business is the amount of inventory on hand that is classified as excess and obsolete. Disposition of Inventory Use as is: Sometimes the inventory has been produced for one customer and that customer no longer wants it. If you still have a business relationship with that customer, the sales department needs to work with that customer to explore all options.

If the original customer s are out of the picture, then you should look at other customers and determine if they have any requirement for a product similar to what is on hand. If the obsolete inventory is an old design, can it be brought up to the latest version of the product? Use components: If your excess inventory is an assembled product or sub-assembly, can it be taken apart and at least some of the components re-used in other products or sold as spare parts?

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Donate for tax credit: Once you have investigated options 1 - 4 and are convinced that you have no way to use even some components, you should consider donating the inventory for a tax credit. A past client with an industrial product worked with EAL and was able to dispose of their inventory, avoid costs associated with scrapping the material, and received a tax credit.One of the issues that can affect the valuation of a distribution business is the amount of inventory on hand that is classified as excess and obsolete.

This could also affect the viability of an acquisition that you may be considering to take your business to the next level. Banks look at inventory carefully when considering working capital lending both to on-going businesses and for leveraged acquisitions. Since the excess inventory is usually stored in the back of the warehouse, in the highest rack locations, or worst case, in an outside rented warehouse, most companies do not address the problem on a regular basis.

Here is a five-step process to dispose of the excess and obsolete material that you currently have on hand. We have also included, after these steps, three suggestions related to prevention.

If you still have a business relationship with that customer, the sales department needs to work with that customer to explore all options. If the original customer s are out of the picture, then you should look at other customers and determine if they have any requirement for a product similar to what is on hand. If the obsolete inventory is an old design, can it be brought up to the latest version of the product?

A past client with an industrial product worked with EAL and was able to dispose of their inventory, avoid costs associated with scrapping the material, and received a tax credit.

Go to www. Here are three common situations that lead to the creation of excess and obsolete inventory. There are others, but understanding and controlling these will usually help:. Note that all of these are based on good intentions, and may be critical to your business. Measurement of these situations is what is usually lacking, i. Force yourself to look at the C's and D's on the bottom of the list at least once a quarter and take action.

Finally, if inventory write-offs and outside warehousing are continuous problems, you may want to consider assigning the disposition and prevention responsibility to a specific person.

We have done this with several clients and the pay-off is always good.

Obsolete Inventory

It is rarely a job anyone wants long term, so they have the incentive to work on the issue aggressively. The Distributor Board provides Advisory Board and Consultative services to wholesale distribution companies.

The Distributor Principles have owned, run, managed, and advised successful distribution companies for many years. Visit www. All rights reserved. For comments or questions about this Web site contact: rvurva directbusinessmedia.

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