Obsolete inventory, is merchandise or other items that you’ve pushed aside to make room for new inventory. Depending on your area of industry, it can be anything from outdated electronics such as, computers, phones, TV’s, or furniture and appliances, etc.
When is the last time you took a look at your warehouse inventory? If it’s been a while, it’s possible that you have a lot of old and dusty inventory sitting around taking up space. You may have a section for defective items to be returned to the supplier that you just never got around to returning. Or, maybe you purchased too much of an item that was selling really well, until it wasn’t. All of these items are considered “obsolete inventory”.
Holding onto obsolete inventory not only takes up a lot of storage space but it can increase your operating costs without generating a profit. When inventory is a key item on your balance sheet, your financial reports may be overstating your assets and income which may have an effect on your business taxes.
Rather than pushing your unsold inventory back into a corner, if it can’t be returned to the supplier, sell it at a discount. You may not make a lot of profit but let’s face it, you weren’t making any profit when it was just pushed in a corner taking up space in your warehouse.
If you find that you often have a lot of obsolete or defective inventory, it may be a good idea to set up a regular date to check on this issue once a month or at least every few months. This way things won’t get out of hand again.
What should you do with your obsolete inventory? Once you’ve figured out what you have, set up a designated area and have a discount sale for these outdated items. While you’re at it, set up a designated area in the warehouse for defective items that should be returned to the suppliers for a credit. Assign an employee to assess the area and return these items in a timely manner to your suppliers. If some defective items can't be returned, recycle them. You should always know where you stand with your inventory. It can save both money and space for your business.
At Summit CPA we offer multiple resources to make your business successful. For a detailed analysis of your business, contact our office at 866-497-9761 to schedule an appointment with our Virtual CFO.