Why Should I Clear Slow Moving Inventory?
To understand why a business needs to cut loose dead or slow moving inventory, it is important to understand some key business measures.
Every business will have some merchandise that will sell faster than others. Every well run business will also be conscious of how many stock turns they do each year. A stock turn is how many times stock is sold each year.
For example, if a business sells $800,000 worth of stock per year and they regularly carry $200,000 worth of stock, their stock turn is 4 ($200,000 goes into $800,000 4 times).
That is they are turning over their $200,000 worth of stock 4 times per year.
Stock on Hand: $200,000
To put this into context, consider this business scenario:
Value of stock not sold in last 6 months: $20,000
Average margin: 35%
If the $20,000 worth of stock had been sold at full margin, sales revenue would have been $30,770 with $10,770 in profit. However, if the stock hasn’t sold in 6 months and there is no foreseeable sale on the horizon, the sales revenue and profit is both $0.
In fact, there is the potential for a loss to be incurred if there is debt involved with the purchase of the stock and rent for the space the stock is taking up.
In contrast, if that $20,000 remained in the bank, there is the potential to earn interest and the space the slow moving or dead stock is taking up, is now available for faster moving product.
So what should you do with Slow Moving Inventory?
Do you hang on to the stock and hope to redeem profit at a later date? Do you give it prime position within the business and hopefully stimulate sales? Do you advertise it and hope to ignite sales?
There are always several variables that will hinder clear cut answers to this question. However some context around what you should or could do may help.
Hang on for profit later ? If it is taking up space and it is not selling, then it is taking up space of product that could be earning a profit many times over.
Giving it prime position? If it were a new range in the business at some stage, it probably should have had prime position already and it may not have worked. Sometimes reintroducing the product can work, though if it has had prime position and hasn’t sold in the months following then it is fair to say it’s time to move it on.
Advertise? Sure you could spend money and advertise it, though it will eat further into your margin.
Why Clear Slow Moving Stock?
Let’s place some perspective around it.
Slow/Dead Stock Value: $20,000
If you were able to redeem the $20,000 in stock and buy stock that turns over 4 to 6 times per year at 35% margin ($10,770), you could be between $43,000 and $65,000 better off. This is because you have been able to turn this stock over multiple times with the same $20,000 base making profit each time. Even if you don’t purchase faster moving stock, having the cash available to bulk buy core product or promotional lines will permit better margin.
Clearing slow moving lines can also allow a business to reduce their average stock on hand throughout the year. This will improve cash flow, reduce debt and permit better space management.
How to Clear Slow Moving Inventory
There are numerous options that I have used over the years to varying effect. However, the bottom line always is moving the stock on quickly.
- Reduce and Clear – consumers love it when they are able to buy something at cost or less. Depending on the volume of stock, it helps to stack it together with signage that creates a sense of urgency. “Priced to Clear”, “At Cost”, “Never to be Repeated”
- Donate to Charity – as a business owner / manager, you will be asked for donations on a regular basis. Use some of the slow moving stock, while you may not receive a monetary return, there will be the emotional return knowing you have helped someone and you may receive publicity that results in marketing expenditure
- Ask the supplier of the slow moving product to subsidise the product through a gift with purchase or a credit to reduce the impact on your bottom line. Alternatively, ask them to swap it. Just because it is slow moving in your business doesn’t mean it is slow moving everywhere. That means they may be able to take it back and move to a location that is able to sell it faster.
Playing hard ball and holding back orders as a way of insisting they help is part of doing business.
- Bundle or package some of the slow moving product with other lines to help clear. Offering a “Gift With Purchase” on higher margin lines ensures the stock is moving out the door with minimal impact on overall margin.
- Dispose of it. Sometimes when purchasing the product with the intent to resell we make poor decisions. If you are leading into a busy period, the space both instore and in storage becomes more valuable. In this case, depending on the value of the product or whether it is perishable, you might consider disposing of it. You will lose sales during the busy periods if you don’t put your best offer forward.
The Ramifications of Not Clearing out Slow Moving Stock
Failure to move on slow moving stock can result in a number of business ailments.
- Cash flow issues – money tied up in stock that is not generating any profitability
- Poor utilisation of space – the ability to store product or display it more effectively will hamper the ability to sell it resulting in poor space management
- Having stock that isn’t moving can result in a certain degree of store blindness. Consumers will subconsciously ignore the part of the business that has not been altered in some time. As a result, sales opportunities will be lost not just in one location but throughout the business
- A decline in overall profitability as a result of lost sales opportunities
Facing Facts with Slow Moving and Dead Stock
Hanging onto slow moving or dead stock is like having an argument and refusing to admit you were wrong. We all make mistakes. However, when it comes to business, failure to move on dead or slow moving stock can be detrimental to the business to the point it could be fatal.
Slow moving stock absorbs cash flow and can take up valuable space that would otherwise be generating an income. Remaining resolute and praying that the stock will sell at full price when a reasonable time has already passed, will result in lost opportunities in terms of sales and subsequently profit.
Confronting slow moving or dead stock and redeeming a monetary value quickly, even if it is returning the price paid, will allow those dollars returned to be reinvested into faster moving stock. Faster moving inventory or promotional stock that will drive sales will turn over faster and result in a healthier business with stronger cash flow and profitability.by