Inventory is the most critical aspect of any business, as you may know. Unfortunately, many small business owners believe they are doing well if they have a few sales, but their figures may be misleading. The explanation for this is straightforward. They are unaware of their inventory.
An aging inventory report is a list of items on hand, organized by the amount of time they've been in stock. It's used to identify slow-moving inventory, as well as the costs of storing and maintaining it until it's sold. You have a few alternatives for preparing the report if you utilize accounting software.
What Is The Definition Of Aging Inventory?
Goods that haven't sold quickly or for their total retail price are referred to as aging inventory. Retailers keep track of aging stock because if an item reaches a certain age and stays unsold (i.e., six months or more), it will most likely need to be marked down to make room for new products. In general, the faster a brand can sell through its inventory, the higher its profit margins.
The Inventory Aging Report's Purpose
Inventory aging reports, also known as aged inventory reports or aged stock reports, show how quickly your inventory moves. Inventory aging reports, like accounts receivable and payable aging reports, inform you how long an item has been sitting in inventory based on the receipt date.
The aging inventory report gives businesses information like:
- Detecting slow-moving objects
- Non-moving things are highlighted.
- Knowing how long your products are in stock will help you make better decisions.
- Calculating the cost of keeping inventory on hand for extended periods
- Having this kind of information at your disposal allows you to make well-informed judgments about what and how many things to buy.
How To Calculate Inventory's Average Age
Let's calculate inventory age by using the age of inventory formula. Take the average inventory cost and divide it by the price of products sold to get the average age of inventory. Finally, the average age of inventory is calculated by multiplying the figure by 365.
The following are the steps for calculating the average age of inventory:
Calculate The Average Inventory Cost
The first step is to figure out what your average inventory cost is. To do so, add the cost of inventory at the start of the period to the cost of stock on hand at the end of the period. The average price of the merchandise is calculated by dividing the total by two. You can get the beginning and ending inventory data by running a balance sheet report using accounting software.
The average cost of inventory is calculated using the formula: (Beginning inventory + Ending inventory) / 2 = Average price of the stock.
Example of Average Cost of Inventory: Assume Company A had $100,000 in inventory on hand on January 1 and $50,000 on December 31. Company A's average inventory cost is computed as follows:
($100,000 + $50,000) / 2 = $75,000 (Average cost of inventory)
Calculate The Cost Of Goods Sold
The cost of products sold must then be determined. This figure accounts for all labor and materials necessary to create the items you sell. Take the initial inventory, add purchases, and subtract ending inventory for the period to calculate the cost of goods sold. Most accounting software allows you to generate a profit and loss report that includes your period's cost of goods sold.
The cost of products sold is calculated using the following formula:
Cost of Goods Sold = Beginning inventory + Purchases – Ending inventory
Let's return to Company A and assume it still has $10,000 in beginning inventory on January 1 and $5,000 in closing inventory on December 31. But now, let's add $6,000 in purchases for the year. Company A's cost of goods sold is computed as follows:
$10,000 + $6,000 – $5,000 = $11,000 (Cost of goods sold)
Determine The Inventory Turnover Ratio (Itr)
The average inventory price calculated in step one is divided by the cost of goods sold calculated in step two as the next step. In our case, the average inventory price is $75,00, whereas the cost of goods sold is $11,000.
Company A's average inventory turnover ratio is:
$11,000 / $7500 = 1.46 (Average inventory turnover ratio)
Take 365 And Multiply It By The Average Inventory Turnover Ratio
Now divide the number of days in a year (365) by the average inventory turnover ratio to find the average number of days it takes to sell an item. For example, because Company A's average turnover ratio is 1.47, we divide that number by 365 to get the average age of an inventory item.
The average inventory age of Company A's is:
365 divided by 1.47 is 248.29 days
This signifies that it takes company A 248 days to sell a piece of inventory. This figure appears to be extremely high without considering any other factors, implying that merchandise may become obsolete before it leaves the shelf. Furthermore, the added expenditures of maintaining the inventory quality for a long time may be significant.
Why Is Inventory Aging Important?
The aging inventory report is one of the most ignored aspects of inventory management. Slow-growing industries and their flaws are nothing new, but the impact of fast-growing inventory management on aging is enormous and underreported. A thorough examination can reveal many hidden problems and drawbacks of inventory expansion, which is often overlooked until it is too late.
Aging controls are frequently disregarded since they are ineffective and should be eliminated from any business. Inventory aging, on the other hand, tells you where your inventory is going wrong.
You can monitor and track inventory and control inventory growth by creating a sophisticated inventory aging and tracking system. With appropriate tracking and administration, you can reduce inventory turnover, make the most of every dollar, enhance revenues, and reap many other advantages.
Inventory aging, like any spreadsheet, should have consistent report templates. However, with accurate tracking and reporting tools, you can quickly create that spreadsheet report and share it with a team or even a group of clients.
Inventory Aging Analysis And Business Health
The aging inventory formula and an inventory aging report are critical to the health and prosperity of your company. That's because an inventory aging study is a valuable tool for lowering storage costs, improving inventory control strategies, reducing surplus inventory, and increasing cash flow all at the same time.
Enhance Storage Cost-Effectiveness
Inventory holding and carrying expenses, unfortunately, do not appear to be decreasing anytime soon. The good news is that aging analysis can help your firm avoid long-term storage expenses, resulting in significant cost savings. In addition, aged inventory information tells you how long a product has been in stock, so you can devise a strategy for getting it out the door.
This is especially useful for firms who use FBA or 3PL warehouses, as both of these alternatives charge a considerable upcharge if your products are kept on hand for an excessive amount of time.
Improve Your Inventory Management Strategy
Inventory control entails keeping track of your stock's supply, storage, administration, and distribution. Overselling, stockouts, and delays in your restocking schedule are typically addressed through inventory control and warehouse management procedures. You can optimize your inventory control approach by combining aging inventory calculations with mentioned techniques.
That's because an in-depth aging analysis guarantees you always know exactly what you have in stock and provides the data you need to increase inventory turnover (i.e., less product expiration, spoilage, obsolescence, etc.).
Keep Superfluous Inventory To A Minimum
Excess inventory refers to items that have reached the end of their useful life but have not yet been sold (and now exceed their projected demand). So said, retaining excess inventory is terrible for a company; not only does a product surplus indicate inefficient inventory management, but it's also bound to hurt your revenue.
Fortunately, by paying attention to old inventory, your organization may avoid reordering things that don't sell and instead build a strategy for getting rid of all of your dead stock. This way, you can develop new products that will increase consumer orders and significant financial gains.
Make The Most Of Your Cash Flow
Because it's your revenue stream that keeps your firm afloat (and it's the money you use to buy more things), maximizing your cash flow will always be a priority. If your company has too much money invested in inactive SKUs, your inventory will likely suffer, and you won't be able to invest in new items.
Retailers can discover which items are paying higher carrying costs or fees as they remain unsold due to aging inventory calculations. From there, business owners may get rid of out-of-date inventory, ensuring that their cash flow remains unhindered.
How To Leverage The Age Of Your Inventory To Help You Plan Your Inventory Management Strategy
You'll need a mix of software and technologies, as well as thorough analytics and reporting, to assist your inventory management strategy to succeed. While choosing the correct inventory tools for your organization will undoubtedly take trial and error, integrating inventory age has been shown to assist companies across all industries.
Ways To Improve Your Inventory Aging Report
If your aging inventory report isn't showing the way you want it to, you're not alone. Recently we surveyed more than 1200 businesses, and almost 80% said they feel the value of their aging report is significantly lower than it could be. So let's get started with an easy method for improving your aging inventory report.
If you don't have a sound inventory management system in place, you risk annoying your consumers, losing essential sales, and storing products that won't sell. However, inventory age might provide a significant boost to your current management strategy and assist you in making critical product pivots (that may have otherwise gone unrecognized or unresolved).
Use Inventory Age To Understand Demand Trends
By focusing on swings in consumer demand and purchase patterns from your customer base, demand trends can inform you how well a product performs. For example, maybe you had an effect that sold well for the first six months after it was released but didn't sell much in the second half of the year. In addition, inventory age is frequently a good indicator of whether an item would deal well with a seasonal promotion, a significant discount, or as part of a product bundle.
Use Inventory Age To Inform Planning
Inventory planning is crucial to supply chain management because it allows shops to buy the right amount of stock and decide how frequently they should replenish. Inventory age can help with inventory planning by recognizing which products don't need to be reordered after all. Similarly, inventory age provides a more solid foundation for your planning because you have a road map to work from and can eliminate a lot of the guesswork involved in this process.
Final Thoughts-The Inventory Aging Report's Key Takeaways
The aging inventory report has numerous significant takeaways:
- It begins by identifying products that are slow to move or do not move at all.
- It provides the purchasing department with the information they require to make better product ordering selections.
- It includes crucial information about the additional inventory expenses you incur when things do not sell rapidly.
The following are some major key points from this article:
The inventory aging report highlights products that are either slow to move or aren't moving out of inventory at all. It can help you figure out why some products are sitting in stock for longer than others—this information aids in determining what products you should order in the future.
Increases the accuracy of inventory buying decisions: The purchasing department may make orders for products that sell quickly and cut or eliminate slow-moving products by knowing what products aren't moving out of inventory.
Provides information on additional costs: The longer a thing sits in inventory, the more money it costs to maintain it "sellable." Long-term storage can be costly, and non-moving items reduce the amount of space available for fast-moving objects.