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Inventory Reserves - Does Your Small Business Need One?

        As a small business owner, it’s imperative to have a complete understanding of your business’ financial inner workings. Part of that includes having extensive knowledge of your inventory and how to manage it properly. Below we define the term “inventory reserve” and explain what you need to know for your small business. What is an inventory reserve? Small business owners are not usually able to predict when bad things will happen to their inventory, such as spoilage or theft; however, you can still take a proactive approach to protect your small business. An inventory reserve is used to help prepare for those unforseen events. Examining past instances of shrinkage and analyzing current conditions in your industry will allow you to make an estimation of how much of your inventory may be lost or may not sell. An inventory reserve refers to the protection used to account for an item not sold at its cost due to deterioration in value. This type of entry is used on a balance sheet to show earnings deductions on the worth of inventory items.   Why would a small business use an inventory reserve?The use of an inventory reserve helps small business owners to estimate their organizations’ losses before they occur and then, in essence, set-aside money in anticipation of those losses. For example, if your inventory is ruined by a weather disaster and the items are rendered useless, you can report this loss by adjusting your inventory reserves. While some of the goods may still be sold and a portion of the original expense be recouped, there is still a need to remove those damaged items from the active inventory. Using an inventory reserve entry helps to minimize the tax burden and create a more balanced financial picture of your small business. A warning about inventory reserveAlthough an inventory reserve can benefit small businesses, it can also create a false image of the financial stability of your small business. For example, if a small business owner were to increase their inventory reserve during profitable times, they can then decrease that inventory reserve when their business is experiencing a down time. Doing this presents the image that a small business is in a better financial position. Please note that as a small business owner you must be able to explain changes to the inventory reserve to an auditor if necessary. Inventory is an important part of your small business that you must understand to ensure your business stay profitable. Wasp’s inventory solutions help small businesses save time and money. Click here for more information about Wasp’s inventory management solutions.