Walk through most commercial warehouses and you’ll find products that have been collecting dust for months, even years. Tires that no one wants to buy, raw materials that are no longer used, tubes of caulking that are good for nothing but the dumpster – all may be considered obsolete inventory.
What makes inventory obsolete?
For one thing, alternative products may arrive in the marketplace at lower costs to the consumer. You might sell refrigerators that, several years ago, were a great value because they offered a “frost-free” feature. Now, however, similar models with digital enhancements are available – at the same or lower prices. This change in product features will often adversely affect the value of your existing inventory.
Many firms have learned that technological advances are a double-edged sword. (Ask any computer retailer.) Perhaps your company makes custom-designed widgets. If demand for such products dries up, you may need to retool and modify your existing product line. Your need for certain expensive raw materials – stuff that’s sitting on your warehouse shelves – may dwindle.
Carrying obsolete products in your warehouse or retail store tends to increase operating costs without generating profit. Besides the cost of storing and insuring such items, you may be forced to incur labor expense to move the products to new locations and account for them. In addition, your financial reports may overstate business assets, especially if inventory is a major item on your balance sheet. Even your tax bill may be affected. Failing to recognize the expense of obsolete inventory may overstate net income.
How can you reduce the cost of excess inventory?
Define “obsolescence” for your major product lines; then be proactive. For example, if an item hasn’t sold in a certain number of months or is being phased out by suppliers, start moving that item by offering sales discounts.
Be willing to write off products or raw materials that are unlikely to generate profit. Don’t wait until escalating storage costs or an auditor’s findings shine a spotlight on obsolete inventory.
Establish a regular schedule for reviewing inventory. Many firms count their goods at the end of the year. That’s great. But knowing where you stand with inventory should be a year-round process.
Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in the McLean and Tysons Corner, VA. Gilliland & Associates specializes known for our superior knowledge and aggressive interpretation and application of tax laws, we help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+