If your stock inventory is poorly managed, or you do not have a clear understanding of your figures, then you might be losing real money on obsolete stock.
One of the most significant difficulties in managing the stock of a company is to avoid divergence between the physical inventory and what is on the books (financial statements). Without efficient and effective inventory management, it is far too easy to accumulate vast quantities of old stock.
The impact of COVID-19 is also exacerbating this challenge for many small businesses, especially wholesalers and retailers. Inventory management is, therefore, key to a healthy business and requires careful planning and improvement of processes.
Before addressing how to manage for obsolete stock, it is worth remembering that an ounce of prevention is better than a pound of cure.
Many try to minimise freight costs, by ordering in bulk, only to be left with more product than there is market demand. Others put too high a price on their items, relative to market competition, only to miss the window of market demand. So, it is worth investing effort in market testing and knowing the competition, to avoid being saddled with outdated and obsolete stock.
Here are seven proactive measures you can take to reduce the number of obsolete items in your stock.
1. Check the stock turnover period
The stock turnover period measures how long an item stays in stock, and helps with quantities and timing for the items to be purchased.
2. Periodic stock sales
When you have precise information about your stock, it is possible to reduce the obsolescence. Having products that are not for the season, or are getting too old in your inventory, results in significantly reduced profitability over time.
It is better to minimise margins or even sell at cost than have outdated products taking the space of new products in your warehouse. Setting up online sales for older items can optimise sales for a different public market.
3. Prepare demand forecasts and plan in advance
A demand forecast is an analysis that enables you to know those items that will be in higher demand so you can prepare for that. A good example is a fashion store, where they place winter products on sale before the spring season.
Demand forecasting should be incorporated into the annual budgeting and forecasting processes, and used to optimise purchasing.
4. Store products systematically
This statement sounds easy, but many companies do not adequately warehouse or distribute their products. Correct storage, such as labelling and bin location, guarantees the physical integrity of the products and enables their easy access and retrieval.
5. Choose good management software
Take advantage of the benefits of good management software to help your business to grow. The benefits of software almost always supersede the investment.
Nowadays, we have accessible cloud-based options on the market, that provide advantages such as: identifying stock levels available for immediate sale and their locations, tracking of the stock-in and stock-out in the system, and (best of all) controlling the cost of the product very precisely.
Knowing about the margins on your products will help you to make better decisions.
6. Integrate your stock software with other systems
The processes of purchasing, sales and inventory management are interrelated, and they influence each other. Therefore, to optimise overall processes, it is best to have integration of the systems for these areas.
Using inventory-management cloud software is the best approach, as it integrates with most accounting software (e.g. Xero and Quickbooks). Or you can opt for Enterprise Resource Planning (e.g. SAP, Zoho). Having such an integration provides management with clarity for optimal decision making.
7. Scrapping obsolete stock
Finally, if you have exhausted all options, and your old stock is indeed obsolete, you can scrap it according to section 70-50 of the Income Tax Assessment Act 1997, which provides that, due to obsolescence or other special circumstances, the taxpayer can elect to write down the stock to a lower value, as long as the value is reasonable.
While there are many factors involved in minimising obsolete stock, a self-assessment is a great place to start. Do you know how much obsolete inventory you have? Do you know how much this is costing you, including any opportunity costs? Do you adequately understand your markets and competitors? And are you learning from your past lessons?