How to get excited about giving inventory away and counting your cash

OK, success! I managed to get you to read the first line of this article with that catchy header.

Yuck! Inventory. Such a dry and boring topic. To be honest, I have been pondering how to write an article about inventory and cash without boring myself, let alone you, for some time.

So, how can I make you excited about stock or inventory that you buy for your business? Sure, the cash part is easy to get excited about. We all get excited about counting our cash! It gives us that warm fuzzy feeling – oh the things you can do with that lovely moolah (cash) sitting in your bank account.

When it comes to your stock, one way to get excited is when you sell it! But what about the stuff that sits around and doesn’t move.

Let’s have a quick look at the concept of inventory. Inventory or stock in any business is considered by our accounting friends to be an asset. Well, is it?

In accounting terms on paper, yes, it is an asset. However, stock in any business is in reality somewhat of a liability, so the sooner you sell it the more excited you should be.

Consider otherwise, all your dosh is tied up in boxes of stuff sitting in your garage or warehouse, awaiting sale. Unless you’re hoarding gold or current Apple products that have some kind of market value, your stock is an albatross around your neck, your cash is tied up.

Now, if you are a pure play online retailer it’s a lot harder to clear slow moving items because you don’t have a shop with a clearance basket to place all that junk you bought for 50 cents a piece and thought was a bargain because it was cheap, but apparently your customers are telling you it’s worthless as they are not buying it. So you are now stuck with it; money down the drain!

So how do you get excited about your dead stock, and how will it actually make you money? As crazy as it sounds, just give it away, but don’t leave it in your warehouse (I’ll come back to this later)!

This is a guerrilla tactic I teach my clients. You probably think at this point that I am out of my mind, “give your stock away???”

However, let me show you how the numbers add up. Remember though, I am not a financial advisor, speak to your accountant before doing this. I just want you to understand what I am alluding to here.

If you are running an inventory system, or at least keep track of your stock in your accounting software, you need to invoice the items out at zero selling price to take them out of inventory – your accountant will explain.

Scenario 1: Let’s say you have sales of $100,000 for the 12 months to June 2013. On July 1, 2012 your stocktake showed that your inventory was worth $10,000 and you bought $50,000 worth of inventory this year. On June 30, 2013 you check your stock and note that you have $15,000 worth of goods in your warehouse. (See the numbers below) To cut a long story short, you have made a gross profit of $55,000 this year, well done!

Sales July 2012 to June 2013 $100,000

Your expenses on stock for the year (known as cost of goods sold or COGS) is calculated as follows:

Stock value on 1 July 2012: $10,000
Add: Purchases for the year: $50,000
Total: $60,000

Less: Closing stock: $15,000

This means cost of goods sold is $45,000

So:

Sales $100,000 – $45,000 = $ 55,000 profit

Tax liability at 30%: $16,500

Scenario 2: Now suppose $10,000 worth of that closing stock is worthless, you can’t sell it, and no one will buy it even at cost. What happens if you give it away? YES, give it away!

See the numbers below for scenario two; your profit has dropped to $45,000 because we gave $10,000 worth of stock away, maybe to a charity or op shop.

Sales July 2012 to June 2013 $100,000

Your expenses on stock for the year (known as cost of goods sold or COGS) is:

Stock value on 1 July 2012: $10,000
Add: Purchases for the year: $50,000
Total: $60,000

Less: Closing stock: $5,000

This means cost of goods sold is $55,000

So:

Sales $100,000 – $45,000 = $ 45,000 Profit

Tax at 30%: $13,500

You’re thinking, “This looks bad”. But hold on, it’s not. To start with, remember that nothing has changed in terms of your cashflow for the year:

  • You still banked $100,000 this year; the cash is safe in the bank.
  • You had $10,000 worth of dud stock, which had you held onto it, you would have paid extra tax, as per scenario one. (Remember, the closing stock was $15,000 which included that bad $10,000 in it.)
  • By giving it away you have reduced your tax liability.

If you have investors to satisfy then the drop in profitability may disappoint them; however, if you are the full owner of your business, you are advantaged because you will hypothetically pay less tax (at 30% company tax rate) i.e. $13,500 as opposed to $16,500, which means you are ahead $3000.

Woohoo! See what I mean about getting excited about stock, especially dead stock.

OK, so maybe you don’t want to give your stock away, you’re not that kind of person, and you think that you’ll just write the stock off and leave it in the warehouse (or garage).

If you choose to write the stock off instead of give it away and just leave it in your warehouse, chances are you may sell it in the future. That’s OK, but remember: anything you sell in the future that has been written off will attract income tax and erode your tax savings I mentioned.

Remember, run this by your accountant before you consider either option!

Mark Freidin is an experienced chief operating officer, eCommerce pioneer and consultant to fast-growing companies in Australia. Find him on Twitter: @internetretail; LinkedIn: au.linkedin.com/in/internetretailing; or on email: [email protected].

 

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