For one thing, alternative products may arrive in the marketplace at lower costs to the consumer. You might sell refrigerators that, several years ago, were a great value because they offered a “frost-free” feature. Now, however, your competitors (even your own stores in other locations) may begin selling similar models with digital enhancements – at the same or lower prices. This change in product features will often adversely affect the value of your existing inventory.
Many firms have learned that technological advances are a double-edged sword. (Ask any computer retailer.) Perhaps your company makes custom-designed widgets. If demand for such products dries up, you may need to retool and modify your existing product line. Your need for certain expensive raw materials – stuff that’s sitting on your warehouse shelves – may dwindle.
Carrying obsolete products in your warehouse or retail store tends to increase operating costs without generating profit. Besides the cost of storing and insuring such items, you may be forced to incur labor expenses to move the products to new locations and account for them. In addition, your financial reports may overstate business assets, especially if inventory is a major item on your balance sheet. Even your tax bill may be affected. Failing to recognize the expense of obsolete inventory may overstate net income.
For help with this or other business problems, feel free to contact our office.
Written by: Doug Rodrigues