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How to Use an Inventory Aging Report to Assess Financial Risks

An inventory aging report is a critical tool for any wholesale executive. Used effectively an inventory aging can be an important indicator of your company’s financial health. It can help you anticipate potential cash flow issues and reduce your company’s financial risk.

Calculating Inventory Age

An inventory aging report may look similar to the more commonly used receivables aging report. Instead of monitoring outstanding invoices, an inventory aging assigns each style to an aging “bucket”. Styles are categorized according to aging units and cost. For example, the aging “buckets” of inventory might be broken down as follows:

  • 1 to 30 days
  • 31 to 90 days
  • 91 to 180 days
  • 181+ days

Your inventory aging report might include details such as the style or item number, warehouse, quantity, pending transactions, available to sell, cost, and extended cost of available to sell. Instead of focusing on quantities available, this report helps you focus on dollars invested, your return on that investment, and the opportunity cost of holding too much inventory. A regular review of this critical report can help wholesale executives in several key areas.

Fast Changing Items

You need to keep your product fresh to keep up with consumer tastes. What sold a few months back may longer be as desirable today. You want to invest your cash in inventory that has the most potential. At the most basic level this report helps you focus your resources where you might get the best bang for your buck. An inventory aging can help you identify:

  • Slow moving items by inventory value and age rather than by quantity
  • Product categories where your have over invested
  • Weak performing divisions
  • Inventory caused by retailer cancellations or late factory deliveries

Once you have identified where your money is tied up you can take targeted action to move those goods out. If you see a recurring pattern of slow moving inventory in a product category or repeated retailer cancellations you can make adjustments going forward.

Replenishment Business and Repeating Staple Items

For those staple items in your inventory you may need to look at other metrics besides a straight up aging. For example, you may need to forecast based on a seasonal selling history. So segment your repeat staple items out of your typical aging report.

For this product category identify which items had the lowest average inventory age for those time frames that were considered the in-season. If you find that you have too much expected inventory try and delay the next incoming shipment. Unlike many other items, for repeating items, you often have more flexibility to work with factories and manufacturers to renegotiate delivery times. Keep in mind your dual goals of preventing a stockout while also minimizing cash flow risk by monitoring your days sale of inventory or DSI.

Inventory Average Age

When monitoring your wholesale company’s health, it makes sense to look at your inventory aging on a summary level. The summary information can really help you see the big picture. Calculate the average inventory age weighted by value and compare it to the previous year. Is inventory moving faster or slower this year?

You may also want to calculate the inventory average age in ratio to sales in previous years, and compare those ratios to your forecasted future sales. Is the ratio of sales to inventory increasing or are you tying up substantially more cash for a small increase in sales? Monitoring the increase or decrease of your inventory age serves as an additional check on the health of your inventory, cash flow, and profitability.

Benefits of Monitoring Inventory Age

Older inventory is typically a sign of financial risk. Conversely, a healthy inventory can bring your wholesale company a wide range of benefits.

  • Reduced warehouse storage costs
  • Less opportunity for lost or missing freight
  • Increased cash flow
  • Reduced risk of factor borrowing base reductions
  • Increased margins
  • Reduced risk of hidden losses

As a wholesale executive you want to squeeze as much juice as you can from the money tied up in your inventory. It’s a natural human tendency to avoid taking the financial hit on slow moving inventory. By monitoring the average inventory age, you are forced to focus on how inventory is impacting your cash flow. Freed cash can be invested in the next opportunity.

Additionally, if you are borrowing against inventory your factor agreement may stipulate that older inventory must be excluded from your borrowing formula. Carefully monitoring your inventory’s age can help you avoid the pain, lost sales, and other costs caused by unexpected cash crunches.

Margins and Markdowns

Finally, unrealized markdowns skew gross margin calculations. If your ending inventory’s book value is inflated then your previous year’s margin will appear inflated as well. So make sure to write down your inventory before closing your books and preparing your financials.

Final Points on the Benefits of Monitoring Inventory Age

As a metric, the average inventory age can help you identify other key areas that impact profitability. This information can help your business reduce warehouse storage costs, as well as minimize the risk of stolen or lost freight. In addition, it can help you anticipate how your factor might adjust your borrowing base. Put together, the benefits of watching your inventory aging can increase your sales, improve cash flow, reduce expenses and increase your margins.

Wholesale Executive Insider helps clients with renovating business for success, in fine-tuning inventory and stock handling to expedite fulfillment, conserve business intelligence, and provide industry-wise insights at every step of the process.

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