Obsolete Inventory and How to Deal With It by Dobromir Dikov, FCCA Magnimetrics

Showing the usage/sales data in a graph will aid with the trend analysis. To account for this decrease in value, we write down or entirely write-off such items in our accounting records and recognize a loss. Slow-moving and obsolete Inventory can become a significant problem for many businesses. This 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. Though obsolete inventory can still impact ideal profit margins, putting items on sale can help replenish some of the costs by attracting bargain shoppers. Upon closer inspection, the accountants realize the company wrote off hundreds of thousands of dollars’ worth of product last year, much of it 1080p LCD televisions.

• The common goal for any inventory management process is to create a system that prevents clutter and stocking issues, making it fast and easy for workers to get the supplies they need.
• Since you cannot sell obsolete inventory, it is considered a loss and can cut into profit margins.
• For young businesses, avoiding obsolete inventory could be a critical step on the path to stronger unit margins.
• Let us show you how topShelf Cloud-Based Inventory Management Software can help you streamline processes, increase inventory visibility and accuracy while increasing your revenue.
• At the end of this post, we’ll show you how you can better manage obsolete inventory going forward.
• Similarly, if a business can’t monitor inventory turn or days of inventory on hand, it has to guesstimate when it should order more inventory.
• The following analysis relies heavily on reporting from your inventory system.

This could include changing your target audience or geographic locations in marketing ads or selling the items on a different sales channel. Quickly identify obsolete inventory before it eats away at your profits. From there, you can make a decision on when to run a flash sale or donate items so you’re not overpaying in storage fees. Not only can a lack of visibility cause obsolete inventory to go unseen , you also risk stockouts of your high-demand products.

How to prevent obsolescence

Damaged goods is a type of dead stock and is sometimes considered obsolete if the product is unfixable and therefore, loses its value. Here are a few tips you can use to avoid or reduce obsolete inventory. There’s also the option of remarketing items that are at risk of becoming obsolete.

This option is more relevant for retailers and distributors that sell finished goods, rather than manufacturers or suppliers that work with raw materials. Perhaps an item breaks easily or doesn’t work as advertised, due to either a design oversight or a mistake in the manufacturing process.

Obsolete Inventory Guide: How to Identify, Manage & Avoid It

And this is critical, especially if we have both materials and produced goods. We would then look at MOH’s trend over time, compare it with lead times, and adjust our purchasing strategy as necessary.

We hold it in a separate credit account, which we present together with the Inventory accounts in our financial statements. Retaining obsolete Inventory only makes sense if future gross profits cover the accumulated holding costs. But we can also calculate the Inventory Turnover for materials by replacing Sales with Consumption in Production. The higher this ratio is, the faster goods are leaving our warehouse. To get a more detailed and actionable insight, we can separate our stock into groups of similar items.

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In that case, it includes the information in a footnote to its financial statements. The journal entry for obsolete inventory affects your financial statements by lowering the asset value. If it’s a significant amount, it implies that your inventory management isn’t as good as it should be. This gives companies an incentive to fudge, delaying recognition or reporting it in small increments. However, GAAP rules require you to make a journal entry for obsolete inventory as soon as you’re aware of the issue. To manage goods levels properly and avoid generating dead stock, we regularly analyze inventory trends and movement patterns. This includes looking into purchases, production consumption, and sales to identify potential indicators for problematic items.

The contra asset account is netted against the full inventory asset account to arrive at the current market value or book value. Through accurate forecasting reports, you can predict when sales will rise, dip, and plateau. Using this data, you’ll be able to order just enough to satisfy customer demand without piling up more inventory than you need. Most businesses determine that its inventory is obsolete once there are no sales after a set amount of time. One of the key ways to prevent inventory from going obsolete, and even enter the slow-moving territory, is to nail down solid inventory tracking processes.

Writing off obsolete inventory

Consider donating dead and https://www.bookstime.com/ for taxation purposes to recover some its cost. If you want to prevent obsolete inventory from raising your costs and cluttering your warehouse, we can help.

Once inventory becomes obsolete, your options for disposal become very limited so catching an inventory problem when it still has some value is very important. In the above example, trends indicate higher usage in but a lower usage in the latest three months . As you can tell by these two examples, the total usage over 12 months is the same but the usage trend by quarter is much different and a better indicator of slow-moving inventory problems. The following analysis relies heavily on reporting from your inventory system. Standard reports are not always readily available, be prepared to have custom reports made for this analysis. More sophisticated inventory systems have several calculations to assist in managing inventory (re-order point, EOQ, etc.) but for smaller companies with less sophisticated systems, custom inventory reports will be needed.

Inventory

For instance, when new products are introduced, and previous versions are not phased out properly, a usage/sales trend line can immediately change without warning. Good communication between product development, sales, purchasing and inventory control, is essential. It is the responsibility of each financial controller and supply chain manager to establish reserves for shrinkage, obsolescence and excess inventory guidelines based on the recommended steps above mentioned in this guide. This gives you the most current information about inventory levels along with other details, such as warehouse receivingand production time lines. Inventory audits can also help you avoid and reduce obsolete inventory by understanding how much you’re paying in holdings costs to store slow-moving items that are at risk of going obsolete. Finding a second home for inventory that’s lingered in the warehouse for too long is one way to recoup the cost of excess inventory.