Disadvantages of Excess Inventory
Inventory that seems to be slow moving and stuck on the shelf is a plague to your small business.
As you know by now forecasted sales and actual sales are rarely if ever, going to match up, and that's okay.
Most small business owners are hesitant to discount or get rid of their slower moving inventory - in fear of decreased profits and revenue.
The idea of "I bought these products for x amount of dollars and I cannot sell them for anything less than x amount of dollars in order to maintain a successful business" is an idea of the past.
There is only so much space in your store.
Most obviously, surplus inventory takes up space in your shop and room on your shelves. This inefficient use of store space should be filled with products that have proven to sell faster.
One easy way retailers track their success and efficiency is by calculating their sales per square foot. This can be done by dividing your annual sales by the total square feet of your store. If you want to go more in-depth with you can keep records of where you stand now compared to years prior, or break these numbers down by department or store section.
Too much inventory in areas of your store will come off as eyesores to customers. If they are forced to sort through unorganized, tightly packed, products they will become annoyed and a lot less likely to make a purchase.
Cash flow is king
The cost of inventory is the largest expense item on every small retailer's income statement. There is no question mismanaging this number can make or break your year. Excess inventory will significantly reduce your cash flow.
Cash flow is essentially all the money that is coming in and out of your business. If a large chunk of your cash is tied up in slow-to-sell inventory, then owners may struggle to make payroll, rent, and other vital expenses.
Keeping track of your days inventory outstanding (DIO) is another straightforward way to evaluate how fast or slow your inventory is moving. To calculate this, you must first divide your ending inventory by your cost of goods sold. Once you have that number multiple it by 365.
DIO = (Ending Inventory / COGS) x 365
You will always want to compare this number with your industry average. Ideally you will want a low DIO to ensure that your cash is not being tied up in inventory. For example, Store A is a clothing store that sells relatively lower priced items that appeal to teens and younger Millennials. Their DIO is very low coming in around 24. Store B specializes in men's dress clothes such as suits, ties, dress shirts, slacks, etc. Their DIO is on the higher side for apparel at 85. This means that these stores will sell their inventory in 24 and 85 days respectively.
If you need to make room for newer merchandise, notice some of your inventory is slow moving, or have other inventory headaches check out our BoxFox services. We connect independent retailers with excess inventory to authorized resellers searching for merchandise just like yours.