Continuing on from Part II of ‘Why Cash is Always King’, let’s discuss what is referred to as ‘obsolete’ or ‘unsalable’ inventory.
Using the ‘inventory turns’ method of analysis, hopefully you have some idea of how you are doing. Buying inventory sometimes presents significant challenges, especially if you are in a highly volatile market. Volatile markets are often a challenge for companies that buy and sell commodities. For instance, a wholesaler providing milk and eggs to grocery stores faces prices changing every day. Sometimes those changes can be significant. National drug store chains sell gallons of milk as loss leaders. The small grocery down the road, they’re probably selling on the high side of the milk market. But no one wants to be left with unsold milk and eggs at the end of the day. Knowing how much to buy each day or each time can be key to reducing losses related to unsalable inventory (outdated milk and eggs).
Let’s look at a more common small to medium size business challenge. For instance, let’s say you are the Controller at ‘My Doll Shop’. Last year, Doll ‘X’ was a very sought after item and purchasing couldn’t even secure all the inventory you needed. However, a few weeks after Christmas purchasing had the opportunity to buy up a significant number of Doll ‘X’. But this year, little girls have their hearts set on ‘Doll ‘Y’. No one is interested in last year’s big hit, Doll ‘X’. My Doll Company is now the proud owner of some obsolete or slow moving inventory. One good thing about dolls, they are not perishable. They won’t rot on the shelves. But, you have dollars locked up in those dolls. Too many owners and managers simply ignore the problem because they have much more pressing issues to deal with. But if that obsolete and slow moving inventory isn’t dealt with, it takes up space. And, if the company is waiting for the Doll ‘X’ rage to come around again, they are probably in denial.
First, someone in your company, if not you, should have the task of addressing obsolete inventory and how to move it. Can it be sold on E-Bay? There’s work involved but E-Bay gets you a worldwide audience. Could you have a really big sale? I don’t have all the answers to this problem but ignoring it will certainly translate into losses at some point. Manage your inventory every day!
Oh, by the way, if you are the newly hired controller, and you’re working for a company that carries inventory, one of your first objectives should be to familiarize yourself with the inventory and, I would also recommend that at the end of the next accounting period (hopefully at the end of the month) you make sure that a physical inventory is scheduled. Once the inventory is completed, it should be compared with the book inventory to determine any gains or losses. And, very importantly, find out how much of that inventory is obsolete or unsalable. It’s far too often a neglected area of the company’s working capital investments.
In Part IV, the final post on CASH, we will look at FIXED ASSETS and the perils of both spending too much or too little.
Questions? Please feel free to comment, ask questions, or suggest other topics.