Slow-Moving Inventory: Identify, Manage & Prevent It

Obsolete inventory is inventory that a company still has on hand after it should have been sold. When inventory can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company. To recognize the fall in value, obsolete inventory must be written-down or written-off in the financial statements in accordance with generally accepted accounting principles (GAAP). Being proactive is critical when it comes to inventory obsolescence, and having a partner like Katana Cloud Manufacturing can help. Katana’s manufacturing and inventory management software is an all-in-one platform that allows you to better understand how, why, and where your products are becoming obsolete. Accounting for obsolete inventory and its value is critical, as it can impact a company’s financial statements.

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• If your company manufactures products that are no longer legal or compliant with the law, it will be challenging to sell them.
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• One way is to use an inventory management system that helps track inventory throughout its lifecycle.

You can learn more about the different ways to forecast demand in our easy guide. Director of Marketing Communications at ShipBob, where she writes various articles, case studies, and other resources to help ecommerce brands grow their business. To learn more about how ShipBob can help you optimize your supply chain, click the button below to start the conversation. By performing regular audits, you can quickly remove inventory that is unsellable or unlikely to sell.

Inventory Write-Off: Definition as Journal Entry and Example

Industry standards and guidelines, as well as your own business experience, help with the judgment call. Ecommerce merchants can now leverage ShipBob’s WMS (the same one that powers ShipBob’s global fulfillment network) to streamline in-house inventory management and fulfillment. With real-time, location-specific inventory visibility, intelligent cycle counts, and built-in checks and balances, your team can improve inventory accuracy without sacrificing operational efficiency.

Customers’ higher expectations, poor stock management and many other factors cause inventory obsolescence. Large, recurring inventory write-offs can indicate that a company has poor https://business-accounting.net/ inventory management. The company may be purchasing excessive or duplicate inventory because it has lost track of certain items, or it is using existing inventory inefficiently.

• Companies that don’t want to admit to such problems may resort to dishonest techniques to reduce the apparent size of the obsolete or unusable inventory.
• With more visibility, you can find ways to optimize inventory to meet demand and avoid common inventory issues, such as overstocking.
• Companies report inventory obsolescence by debiting an expense account and crediting a contra asset account.
• This can result in action to dispose of the obsolete items, perhaps returning a small amount of cash to the business.

If a competitor offers a higher quality or more affordable product, you can bet that most customers will stop purchasing from one company and turn to the more appealing option. This can leave a small business with obsolete products that are unsellable. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. A write-down occurs if the market value of the inventory falls below the cost reported on the financial statements.

Save Money and Time With Inventory Management Software

If even a highly-experienced liquidator refuses your inventory, writing off the obsolete products may be your best bet. While businesses will often liquidate all of their inventory before closing shop, a company can always consider liquidating a certain segment of their inventory that’s fallen into obsolescence. To liquidate inventory, you’ll want to work with a surplus reseller specializing in moving “unwanted” inventory. Flash sales, buy-one-get-one offers, and other promotions can also help your company move obsolete inventory before losing its value. Obsolete inventory is also known as excess inventory or dead inventory. Alternatively, you can try product bundling obsolete items with a fast-selling item (and even offer free shipping).

Slow-Moving vs. Obsolete Inventory

Even a rudimentary computerized inventory tracking system is likely to record the last date on which a specific part number was removed from the warehouse for production or sale. If so, it is an easy matter to use a report writer to extract and sort this information, resulting in a report listing all inventory, starting with those products with the oldest “last used” date. By sorting the report with the oldest last usage date listed first, you can readily arrive at a sorted list of items requiring further investigation for potential obsolescence. The journal entry for obsolete inventory reserve is often a best guess rather than hard numbers. However, you can’t be sure it will sell at that price, so you may have to adjust the reserve to reflect reality. If it then sells, you debit ​$10​ to Inventory Reserve and credit ​$10​ to Inventory.

The ultimate guide to obsolete inventory

The world is always changing, and other companies are coming out with newer, better versions of the same product. Your products will eventually become obsolete and no longer have a consumer base. Below, we’ll look at an obsolete https://kelleysbookkeeping.com/ inventory definition, the causes of obsolete inventory, and strategies for managing it. In the above example, trends indicate higher usage in 2018 (good news) but a lower usage in the latest three months (potentially bad news).

Good communication between product development, sales, purchasing and inventory control, is essential. A final source of information is the preceding period’s obsolete inventory report. The accounting staff should keep track of these https://quick-bookkeeping.net/ items and notify management of those for which there is no disposition activity. Dead inventory warns investors that the company may have poor inventory management, second-rate products, or inaccurate management forecasts of demand.

How to prevent obsolete inventory

If items still have sales potential in a specific market, you could rethink your marketing strategy. This could include changing your target audience or geographic locations in marketing ads or selling the items on a different sales channel. Though there are several ways to help avoid accumulating obsolete inventory, carrying any type of dead stock is inevitable. Here is what to do if you end up carrying inventory that has become unsellable.

Pairing this account with Inventory shows the true value of your stock. Inventory write-off is when a company formally acknowledges the products have lost all value and are now unsellable. Ultimately, your inventory may have become so obsolete that there’s no demand for it whatsoever.

If your warehouse consists of items that are no longer in fashion, it could quickly become stale inventory. This means that manufacturers must keep track of their inventory to ensure they are not spending too much money on unsellable products. 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.

Products may sell well initially, then become slow-moving and eventually be classed as obsolete inventory, a.k.a dead stock. Regarding accounting, stock that doesn’t sell for a year or more is classed as a liability and eventually a write-off. Obsolete inventory is any excess products or stock a small business has and doesn’t expect will sell, usually due to lack of demand. Also known as dead inventory, obsolete inventory is at the end of its product life cycle—often because it has been replaced in the market by newer, updated versions of the product.