Does This Inventory Make My Business Look Fat? – Rea CPA

Does This Inventory Make My Business Look Fat?

Diet and exercise. Ugh. With spring right around the corner, many of us are scrambling to shed that extra winter weight by eating right and exercising. If you’re focusing on your personal health, look at your business, too. Is it overweight? Inventory, fixed assets and unused supplies have hidden “carrying cost” that can weigh your business down.

Some of these overlooked costs include

  • Insurance
  • Storage and facility
  • Inventory movement (wages)
  • Taxes
  • Cost of capital

Depending on your situation and industry, these expenses can average 25 percent of your inventory costs. While businesses in Ohio no longer pay personal property taxes based on average inventory cost, business owners often ignore the other carrying charges.

Do you know your carrying costs? Do you know how often your inventory turns? Do you have equipment that you haven’t used in some time?

The answers to these questions may uncover opportunities to make your business healthier. So why not start now? Here are some tips to help you get started.

  1. Calculate your inventory turn by product line. Compare these turns with industry averages. Inventory turns indicate how many times you’ve sold your inventory during the year. So if you calculate your inventory turn to be six, that means you are replacing that inventory for resale about once every two months. This metric is industry-sensitive. For example, a jeweler may have a goal to turn inventory 1.5 times per year. However, this same metric would be disaster for a grocery store.
  2. Get rid of old non-producing assets including inventory, equipment and supplies. Sale of old unused equipment can provide needed capital and free-up needed facility space.
  3. Compare margins by product line with turns to assist in determining optimum ordering quantities. Again, reducing ordering quantities can help you hold on to capital. The analysis will also help you decide which products provide the best return on your investment.

Reducing these carrying costs will add dollars to your bottom line and increase the viability of your company’s future success.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 3/13/2013.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.