Why Every CFO Should Care About Excess Inventory in 20243 min read
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Despite improvements in inventory planning solutions over the years, companies still face challenges with excess inventory due to uncontrollable factors such as shipping delays, market volatility, unpredictable weather changes, or unanticipated drops in consumer demand. Inefficient planning and management of this type of inventory can lead to a variety of issues, from environmental waste to devalued products and financial constraints.
Excess inventory is often addressed as an afterthought, and as a result many brands are leaving money on the table. Here’s why every CFO should make excess inventory a priority in 2024.
Excess Inventory Hurts the Bottom Line
The carrying costs of excess inventory are high, with common disadvantages including cash flow issues, inventory devaluation as time goes on, and warehousing costs associated with storing unsold inventory.
Cash Flow Issues & Accrued Interest
Ideally, companies use cash flow from sales to pay back debt associated with the purchase of inventory as well as mitigate interest payments. When companies are left with too much inventory that they can’t sell, they can run into cash flow issues that prevent them from effectively repaying loans.
Inventory Devalues Over Time
Unsold inventory depreciates exponentially over time, and it’s in a brand’s best interest to sell inventory as fast as possible to recover the best possible margins. There are situations where it may become difficult for brands to do this as time passes on, and as a result, many brands resort to discarding/destroying goods or simply selling at a loss. For example:
- For consumer goods, there’s the risk of products reaching their expiration dates or spoiling. Once products reach this point, they can no longer be sold or donated.
- For fashion, products may go out of style quickly due to seasonality or changing trends. With minimal demand, brands are more likely to sell this inventory at a significant loss.
Increased Costs for Storing and Managing Inventory
Another major concern that can hurt your bottom line is storage costs. More warehouse space allocated to excess inventory means less space available for selling in-demand, revenue-generating products. Aside from warehousing costs, excess inventory also creates additional labor costs as personnel is required to manage it.
Destroying or Discarding Goods Is Costly
Many brands have historically destroyed or discarded any excess inventory to avoid accruing costs over time. This mindset is now changing as sustainability goals become a key priority for organizations. In addition to causing environmental harm, there is a huge financial impact to destroying or discarding excess inventory.
There are high operational costs associated with transportation of goods to landfills, as well as destruction or incineration. Destroying goods in particular consumes a considerable amount of energy and can lead to high carbon emissions, which in turn pollutes the environment. In recent years, strict laws have been introduced to ban or limit corporations from destroying or discarding unsold inventory. As more regulation around landfill waste and destruction continues to be enforced globally, brands must implement new solutions to sustainably address growing inventory issues or risk facing hefty fines for noncompliance.
Every CFO understands how big of an expense inventory is for their organization. However, without prioritizing the management of excess inventory, CFOs risk putting a serious financial strain on the bottom line. It’s critical for CFOs to partner with their peers in the supply chain and sales teams to re-evaluate processes and implement solutions for greater inventory visibility, automation, and insights. By effectively moving this inventory into other channels earlier in the product lifecycle, brands can get a significant financial boost and free up working capital.