Lurking in the bowels of your facility may be a silent destroyer of your company balance sheet…….expired, obsolete, damaged or unsaleable inventory.
There are many reasons why companies hold onto old inventory, but few realize the costs and damage that is happening by sitting on stores of obsolete products.
Ignorance about these costs of dead inventory maybe placing your business in peril.
Let’s take a look at why companies hold onto dead product, and look at how certified product disposal could be the answer to freeing up space in your facility and opening up financial possibilities for your business.
Why Are You Holding Onto Obsolete Inventory?
“Obsolete inventory is one of the largest components of inventory cost and often is larger and more costly than executives are willing to admit. Many suggest optimistically (and often sheepishly) that there is no such thing as obsolete inventory because it will sell someday.” (Source: Industry Week)
There are lots of reasons why companies have obsolete inventory on the books and gathering dust in warehouses.
Some were “sure things” that were aggressively procured or manufactured.
Items may line shelves because they were over forecasted by sales departments, or did not sell for a variety of reasons.
Maybe some of these products were overly technical for mass consumption, required sales and marketing investment that exceeded their margins, or some were just bad design or had bugs leading to heavy returns.
Whatever the reasons, if you have these dust collectors in your facility, are you one of these hopeful dreamers that believes that one day you will recoup your investment?
If you are reading this article, maybe you are looking for a new direction.
Let’s quickly take a look at the costs.
What Is Your Obsolete Inventory Costing You?
According to the Industrial Distribution website, “Quite often, even among well-run businesses, the actual costs of inventory are inaccurate, underestimated and incomplete. While most resellers know they have dead inventory, many are unaware of just how much. Our experience, supported by other studies, shows that in even well-run companies, anywhere from 20-30 percent of inventory is dead or obsolete.”
And all of this dead inventory can add up to heavy carrying costs.
Normal warehouse costs include all costs related to rent, property taxes, building maintenance, electricity and other general utilities…...but warehousing costs are not the only costs associated with dead product. Other costs to consider include:
Cost of capital/money- Finance and insurance
- Discounts
- Selling area
- Handling costs
- Other administrative expenses
- Opportunity Cost
If 20%-30% of your warehouse space is storing dead or slow-moving inventory, you might need to rent additional space to have room for the faster-moving and cash producing items.
Lack of available space for new product lines, new machinery, or expanded office space may cause a company to expand or relocate its facility unnecessarily. Buying or leasing warehouse space only to fill it with dead inventory is a waste of money.
“When all additional costs are taken into account, the total cost of holding inventory can represent a shocking 25-30 percent more than the inventory’s unit cost value.
In addition, having your cash tied-up in inventory-related expenses has an opportunity cost, which can translate to as much as 15 percent or more. Getting an accurate, realistic measurement of what inventory truly costs is a smart first step to saving.” (Source: Industrial Distribution)
What Are The Tax Implications
According to Jennifer Barrett, Senior Accountant at McLean, Koehler, Sparks and Hammond in Frederick, MD, there are tax implications to be aware of when dealing with obsolete inventory.
For tax purposes, a company is able to take a deduction on their tax return for obsolete inventory if they are no longer able to use the inventory in a “normal” manner or if the inventory can longer be sold at its “normal” price. The ability to take a tax deduction for obsolete inventory can only occur if the inventory is disposed of in 1 of 3 ways:
1. Selling it – This does not mean selling the inventory at a reduced price to your existing customer base. Rather, this is the sale of inventory to a place such as a liquidator or junkyard. The deduction received in this case is equal to the amount of the fair market value, less what you are able to recover for the item.
2. Donating it – A tax deduction may be taken if the obsolete inventory is donated to a charitable cause at no cost to the charity. If the inventory is used directly to care for the needy, ill, or infants additional deductions may be available.
3. Destroying it –If you can’t sell or donate inventory, then you may be allowed to take a write off. The IRS requires you to document the before and after of the inventory that is destroyed.
If you find your company in this position, consider both aspects. Regular review of your inventory will not only help to avoid large write-offs at year end, but will also help with tax planning. (Source: MKS&H CPA’s & Business Consultants)
Certified Product Disposal Is Your Destruction Solution
If you have inventory in your facility that is not of interest to a liquidator or charity, certified product disposal may be your best bet to maximize any possible tax deduction.
Certified product disposal is a process whereby products are destroyed or disposed of and the process is authenticated with a certificate of destruction and photographic and/or video evidence of destruction if required.
A reputable disposal company will handle your disposal in a professional, confidential, and cost efficient manner.
It is crucial that your obsolete inventory is legally disposed of. Qualified product disposal companies will provide you with the necessary assurances that the job is being handled properly.
Now more than ever maybe the right time to clean up your facility and improve your balance sheet, if you have inventory that has not been touched in awhile, contact a reputable certified disposal company to get a quote.
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