An inventory write-off is the formal recognition that a portion of a company’s inventory no longer has value. Sometimes inventory write-offs are necessary. However, large, recurring inventory write-offs can indicate that a company has poor inventory management.
So, how do you eliminate inventory write-offs? It starts with these four actions:
Implement an asset tracking system
According to our
2015 State of Small Business Report, 46% of SMBs with 11-50 employees don’t currently track inventory or use a manual process such as Excel. Although Excel can serve a number of business purposes, it can lead to foolish inventory mistakes and even costly write-offs.
Amarillo National Bank experienced firsthand how
ineffective inventory management can lead to costly write-offs. The bank, which ordered large quantities of supplies, such as slips, banking forms, pens and paper, and then fulfilled requests for supplies from various branches, kept track of inventory on two complex Excel sheets. Not only did the accounting department struggle to keep up with the time-consuming process presented by the Excel sheets, billing of the individual branches was constantly behind. This led to significant inventory write-offs, totaling tens of thousands of dollars per year.
Implementing an inventory tracking system, like
Wasp’s Inventory Control Software, can help avoid the costly mistakes that lead to write-offs.
Avoid purchasing excessive and duplicate inventory
To succeed, all businesses must know how much inventory is needed and ensure they aren’t carrying either too much or too little stock.
Inventory overages not only tie up funds and raise storage costs, they can also lead to write-offs if you aren’t able to move that inventory in a timely manner.
Keeping accurate inventory records can help you avoid purchasing duplicates of what you already have in stock. Because Wasp’s inventory system includes a history file, you can also use the information on file to make informed purchasing decisions, and avoid purchasing too much inventory as well.
Utilize write-downs as necessary
Companies with efficient inventory management identify the root causes of slow-moving inventory and determine ways to reduce the creation of excess and obsolete stock. They also focus on ways to sell off that excess and obsolete stock more effectively. One way to get rid of slow or non-selling inventory is through the process of write-downs.
If inventory still has some value, it should be written down instead of written off. Although you take a hit when you
write-down inventory, write-downs are preferable to write-offs, and clearing out old merchandise can help your business avoid writing off large amounts of non-selling inventory.
Create an Inventory Reserve
Although it won’t prevent inventory items from losing value, most companies prepare in advance for inventory losses due to write-downs and write-offs by
creating an Inventory Reserve. Calculating historical selling data and current market conditions allows businesses to project the recommended reserve. This inventory reserve is accounted for as an expense on your company’s income statement. It needs to be emphasized that the inventory reserve is an allowance, an amount designated and set aside in advance of your inventory actually losing value.
Keeping accurate inventory records can help you avoid purchasing duplicates of what you already have in stock
|
When an item you are holding does lose value, the write-off amount is deducted from your reserve. The potential problem is not allocating enough funds to the reserve. In this case, 1% of your total inventory is a fairly conservative amount, and it requires you to be vigilant in managing your inventory and deducting losses in a timely manner.
Successfully tracking inventory is the best way to prevent inventory write-offs. Fortunately, software like Wasp’s Inventory Tracking can help. Ready to take the first step toward improving your business’ overall inventory management? Try
Wasp's InventoryControl Inventory Tracking Software for yourself!
