Whether bought-in inventory, finished goods or raw materials, slow-moving stock is not only something that takes up space, it also ties up cash.
Retailers tend to be disciplined with their inventory management, monitoring it item by item to maintain high prices and thereby margins for those that sell quickly and reducing prices or holding a sale for obsolete and slow moving items.
However, non-retail business often keep stock for a long time, without considering the financial aspect of whether it would be better to keep it or get rid of it.
A regular review of stock and its financing is necessary for an efficient business. If stock is purchased on a 30-day credit and has been sold before the end of the period that is good stock and cash management.
It is not so good when money is tied up in stock that has been on the shelf for months, so it is a good idea to have a system of monitoring with regular reviews to assess the value and consider what to do with it.
Most companies account for stock as a current asset on the balance sheet, but this can deceive them into believing its value and the prospect of it being turned into cash. Indeed most small businesses only carry out a stock-take and adjust the stock value in their accounts once a year, normally when they prepare the annual accounts.
Monitoring stock-turn, aging and margins will allow strategy to be set as to how long stock should be held and how to get rid of it.
Regular stock-takes will identify how much cash is tied up and whether or not it is better turned into cash, even when this is at a loss.
Getting the balance right is key to the survival of many businesses.