With the holiday season fast approaching (Black Friday is mere hours away), successful retailers will be in control of their inventory. They know what will sell and how much they need to stock. They also know the holiday season is a perfect time to get rid of slow or non-selling inventory through the process of write-downs. J.C. Penney recently used this strategy – the extreme write-down – to bring customers into their stores. Their hope was to clear out old merchandise and avoid writing off millions of dollars in non-selling inventory. Additionally, if customers were enticed through Penney’s doors by substantial write-downs, those customers were more likely to purchase other items. Penney’s pre-holiday strategy began well before Black Friday and left other retailers behind.
Holding stock for too long increases your chance the market price for the item will fall below what you actually paid for it. The item itself isn’t without value; however, if customers don’t want the item, you may be forced to write-down the item’s price below what you paid. Any
inventory write-down must be reflected as an expense on your income statement. Thus, if the value of inventory declines, your company incurs a financial loss.
J.C. Penney’s recent struggles: rebranding, loss of consumer interest, declining stock value, and shoplifting are evidence of poor inventory analysis and management. Former CEO, Ron Johnson’s rebranding effort caused a
$1 billion dollar loss last year, and has caused long-term ripple effects; primarily, the need to liquidate inventory through extreme write-downs. For example, a pair of Izod pants sold for just
$1.97 – an inventory write-down of roughly 95%.
Case Study:
The Health Sciences Learning Center of Pensacola Junior College was losing money because of their inefficient inventory management. They were tracking some 5,000 items using Microsoft Excel – medical supplies spread out across dozens of closets and offices around campus. Because of their poor inventory management, the program could not accurately determine an appropriate fee when charging each of their 1000 students – effectively “writing-down” the cost of supplies without even knowing. By implementing
Wasp’s Inventory Control, the center was able to reduce their stock of supplies by 65% and begin to efficiently track their inventory and assign an accurate fee for the medical supplies students used during lab.
Although you’ll take a hit when you write-down inventory, write-downs are preferable to write-offs. A
write-off is the formal recognition that a portion of a company's inventory no longer has value. Most companies prepare in advance for inventory losses due to write-downs and write-offs by creating an Inventory Reserve.
The recommended reserve is projected by calculating historical selling data and current market conditions. 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.
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. 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. Unfortunately, J.C. Penney’s did not calculate correctly and did not allocate enough reserve funds; they wrote off some tax offsets by
$184 million dollars.
Companies with
efficient inventory management identify the root causes of slow-moving inventory and determine ways to reduce the creation of new excess and obsolete stock. They also focus on ways to sell off that excess and obsolete stock more effectively.
Case Study:
Amarillo National Bank, headquartered in Amarillo, TX, reduced their inventory write-offs from tens of thousands of dollars to just a few hundred dollars annually by implementing
Wasp’s Inventory Control solution. Because of their large number of branch locations, the bank found it difficult to account for the location of their inventory items – often resulting in needless purchasing and inaccurate billing. Now, they are able to track inventory efficiently from the originating purchase order, to receipt of stock, to movement between branches and, ultimately, to removal from stock.
Unfortunately, there are times your small business will need to write-down or write-off inventory – maybe the “it” item of the season ends up being a dud. However, this should be the only reason you report an inventory loss. Using an inventory management solution will keep you from the mismanagement of your inventory and the need for writing down or writing off your inventory.
