Obsolete Inventory and What to Do About It

Software programs can help business owners improve forecasting and order management in order to make better purchasing decisions. Likewise, inventory audits can help companies get a better idea of their holding costs, which in turn can reduce inventory obsolescence. By keeping up with market trends, businesses can adjust their production levels and inventory orders to match anticipated demand, reducing the risk of overproduction and excess inventory. This can help to minimize storage and handling costs, improve cash flow, and optimize profitability, while ensuring that the business remains competitive in the market. To analyze sales data, businesses can use a range of tools and techniques, including sales reports, trend analysis, and inventory turnover ratios.

But candy still tastes good, and roses are still pretty—leaving sellers in a position to still move the products, even for less than they had hoped. Obsolete inventory can cause massive profit losses for businesses, but it’s a risk that can always be mitigated to some extent. With the right data, you can identify slow-moving items and make decisions on whether to discontinue certain items or run a promotion to sell slow-moving items faster before they completely lose their value. With ShipBob, you can split inventory across our international fulfillment network and easily track and manage inventory in real time all through ShipBob’s user-friendly merchant dashboard. Though there are several great inventory forecasting solutions on the market, you can always rely on a 3PL to provide the insights you need to better forecast demand without the extra cost. Having access to supply chain data can help you improve supply chain efficiency, including how well inventory is managed.

How do you test if inventory is obsolete?

Unorganised inventory management leads to poor inventory tracking and ordering mistakes. When you cannot sell your inventory for a long time, it starts losing its value in the market. In this case, the companies should recognize the fall in value and either write-down or write-off as of the generally accepted accounting principles (GAAP) rules. 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. Though there are several ways to help avoid accumulating obsolete inventory, carrying any type of dead stock is inevitable.

If a business produces more goods than it can sell or store, the excess inventory may become obsolete over time. Overproduction can occur for a variety of reasons, including misaligned production schedules, inaccurate demand forecasting, or inefficient production processes. Many companies are unsure what to do with obsolete stock and make the mistake of not liquidating it right away. Some companies will sit on their obsolete inventory to avoid showing a large write off or expense on the quarterly report.

Why Does Obsolete Inventory Matter?

If a company with slim margins consistently finds itself with obsolete inventory and doesn’t address the problem, it could end up in a deep hole. In the past, if the inventory was held for too long, the goods may have reached the end of their product life and become obsolete. Currently, with technology, the state of abundance, and customers’ high expectations, the product life cycle has become shorter and inventory becomes obsolete much faster. Deskera is an all-in-one cloud-based business software that can help businesses in handling financial risks by providing a range of features and tools that enable effective financial management.

With the help of this article, we will figure out what is obsolete inventory and how to avoid it. Roger Johnson has more than 30 years of private and public company experience as CFO, VP of Finance, Controller, and Director of Finance and Administration. His industry background spans manufacturing, distribution, supply chain, and financial services industries. Roger has over 20 years of extensive international experience in Asia and Pacific Rim countries and was an expert Foreign Lecturer in the People’s Republic of China for the Central Institute on Finance.

Selling it at discount

You can accomplish this by extending the usage/sales by quarter like in the above example to include the previous year and if necessary, the year before that. The path from valid inventory to obsolete inventory usually passes through the phases of slow-moving, to excess, to obsolete for both raw materials and finished goods. If your company cannot audit everything more than once a year, perform inventory cycle counts on items at highest risk of obsolescence.

• For example, there are companies in the aerospace industry that do a good business by inventorying seldom used parts.
• The burden of file maintenance can be an obstacle in using advanced inventory calculations to keep inventory at the correct levels.
• Remarketing can help businesses to recoup some of the losses incurred from obsolete inventory by generating renewed sales and increasing the product’s perceived value.
• Supply chain forecasting uses data and research to predict how smoothly a business will run.

In addition, businesses can use inventory management software to track inventory levels and identify slow-moving or excess inventory. This can help to optimize inventory levels, reduce carrying costs, and improve cash flow, while minimizing the risk of obsolete inventory. The main purpose of identifying and addressing obsolete inventory is to minimize storage costs, free up space, and avoid negative impacts on a company’s overall profitability and cash flow.

Example of the Accounting for Obsolete Inventory

A write-down occurs if the market value of the inventory falls below the cost reported on the financial statements. A write-off involves completely taking the inventory off the books when it is identified to have no value and, thus, cannot be sold. Inventory refers to the goods and materials what does vertical analysis of a balance sheet tell about a company in a company’s possession that are ready to be sold. It is one of the most important assets of a business operation, as it accounts for a huge percentage of a sales company’s revenues. Write a description of the journal entry in the accounts column on the third line of the entry.

Additionally, lean manufacturing can help businesses to reduce costs, improve quality, and increase customer satisfaction, ultimately leading to greater profitability and competitiveness in the market. By implementing lean manufacturing practices, businesses can improve their agility and responsiveness to changes in demand, reducing the likelihood of obsolete inventory. In this section, we will explore some key strategies that businesses can use to avoid obsolete inventory and maximize their profitability. For example, a business that manufactures electronic devices may repurpose obsolete components by using them to build other products or by selling them to other manufacturers.