Calculate SLOB Inventory: Slow Moving And Obsolete Inventory

Let’s assume that a business is engaged in producing electronic goods and it has an inventory of electronic components that have been in stock for over two years. The business is now concerned that these electronic components may have lost their value and may no longer be usable in their production process. To determine whether an inventory obsolescence reserve is needed, the business should review the inventory to determine whether it is still usable.

This occurs when inventory or equipment is no longer useful due to changes in technology or consumer preferences. With the rise of smartphones, those flip phones become functionally obsolete and will not sell. While most businesses do an inventory write-off at the end of each year, if you have a large inventory, you should account for significant changes once every month. Now that we have the Usage Percentage, we can assign categories to our inventory items.

Supporting application materials

To calculate the slow-moving inventory, we need to start by calculating the Inventory Turnover (or Stock Turn) in column H. You must know what the inventory turnover is for every single product by dividing the value of the stock by the sales, multiplied by the period (indicated in a number of days in column H). Calculating your company’s inventory turnover ratio is essential if you wish to eliminate your slow-moving and obsolete stock. Obsolete inventory refers to products that are not needed anymore, are out of date, or are old collections. They can be products that need to be destroyed because they cannot be sold any longer, donated, or that will need to be heavily discounted. Obsolete inventory significantly impacts a business’s finances, as it loses 100% of its value or more (costs of destroying goods also have to be taken into account).

• The physical inventory results directly impact the unit’s cost of goods sold, revenue, and profit, and ultimately, the information presented on the university’s financial statements.
• Real-time access to data across the supply chain is beneficial for real-time inventory management.
• Say that each of these products had an initial cost of $1,000 each, and you have 10 on hand of each of the items.
• This adjustment reflects the reduced market value of these items, which are not expected to be sold at their original prices or possibly even sold at all.
• This can happen with technology products such as laptops or smartphones, where newer models come out every few months.
• A cost-of-goods-sold transaction is used to transfer the cost of goods sold to the operating account.

By adopting these strategies, you can minimize losses due to obsolescence and improve overall profitability for your business. I will walk you through one of the simplest forms of overall analytical review you can perform on stock on hand at your company, to get you started on the journey of eradicating obsolete Inventory. https://investrecords.com/the-importance-of-accurate-bookkeeping-for-law-firms-a-comprehensive-guide/ We close the provision and decrease our inventory account balance, as these items will no longer be our property. We write-down when the realizable value falls under the cost at which we have recorded Inventory. And as soon as the stock has no value and we plan to take it off our records, we have to write it off.

Tips for Handling Obsolete Inventory

Though there are several great inventory forecasting solutions on the market, you can always rely on a 3PL to provide the insights you need to better forecast demand without the extra cost. There’s also the option of remarketing items that are at risk of becoming obsolete. With more visibility, you can find ways to optimize inventory to meet demand and avoid common inventory issues, such as overstocking. Though inventory forecasting is rarely 100% accurate, it becomes even more challenging when there isn’t enough historical order data or market insights to help make the best decisions. With today’s technology and customers’ high expectations, the product lifecycle has become shorter across industries, making inventory become obsolete much faster (e.g., fast fashion). If you were the manufacturer of mobile phone antennas, you were likely left with a lot of obsolete stock when smartphones started getting smaller and no longer needed external antennas.

It’s important to note that some goods will be sent straight to donation or waste without ever going through the discount process. Because of this, your sell through rate may appear slightly lower than it is in reality. Discount sales software can help identify these gaps and give you a more accurate benchmark.

Inventory Reserves- Common Types, Uses, & Calculations- Recommended Reading

For example, even though there is some market for obsolete computer equipment, you will be hard-pressed to sell expired food and drink. In this case, you will be discarding the product, so you will need remove the inventory from the company’s books. In addition, if the inventory is included in the obsolescence reserve, you must remove it from the reserve as well. Spoiled or obsolete inventory will almost always have a value that is less than cost. As such, the company must make an adjustment to bring the inventory value down to market price.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Conducting an accurate physical inventory is a vital component to creating an accurate, consolidated balance sheet at the university level. The physical inventory results directly impact the unit’s cost of goods sold, revenue, and profit, and ultimately, the information presented on the university’s financial statements. When selling inventory to a non-Cornell entity or individual for cash/check, record it on your operating account with a credit (C) to sales tax and external income and debit (D) to cash. When selling inventory and recording an accounts receivable, use an accounts receivable object code. Lower of cost or market (LCM) inventory reserve is a provision created by a business to account for the potential loss in inventory value due to a decline in market value.

It’s generally best to look at the trailing 12 months of results, but the more you examine, the more reliable (and seasonally adjusted) your numbers will be. Dig into your historical numbers, and identify the total cost of available excess inventory. That includes all finished goods inventory that your company didn’t sell through its normal, everyday channels and instead moved to discount, donation, or disposal channels. Divide the cost of all of the inventory that did sell to this subset of customers by the total cost of available inventory.Repeat that process after each closeout cycle and you’ll start to see a pattern.

Digitizing the audit process will automatically create a digital trail of your operations transaction history with less human error. Not only will this significantly bolster the efficiency and accuracy of your materials data, but it also keeps valuable account information secure. This information catches redundancies and eliminates rogue spending so you can prevent future sunk costs before they happen. In traditional reporting systems, this level of tracking may only be possible on a location-by-location basis, but with digital solutions, all of this is possible on an organizational level.

Improvements to existing International Accounting Standards (2001-

We have €14 mil in obsolete Inventory, and another €17.5 mil in slow-moving goods, meaning almost 30% of our stock on hand is close to useless for the company. The percentages will work as the bracket’s start, meaning we mark every item with a Usage Percentage between 5% and 25% as Slow-moving. Here we calculate the Average Inventory as the average between the Opening and Closing balances of our Inventory accounts. Navigating Law Firm Bookkeeping: Exploring Industry-Specific Insights One way to support that is by decreasing the slow-moving Inventory and replacing it with fast-moving items. Embracing this digital transformation will revolutionize your company’s approach to inventory auditing. Using forecasts based on predictive analysis, you can determine which parts are needed on hand for frequent repairs, which sites need more repairs than others, and where you can turn in times of emergency.