The success of any retail business depends on many factors, but the most crucial one is the right inventory management. Location, marketing, decor, music, and displays all matter, but the heart of your business remains what you choose to put in it. In this guide, we will discuss the best practices for managing inventory to increase profits, keep the right goods in stock, and run an all-around better business. Today, we will share some inventory aging basics to get you up to speed, explain the key metrics for maintaining optimal stock levels, and give you practical tips to keep your sales high and inventory costs low. Let’s get into it!
What is Aging Inventory in Retail?
Inventory aging is any stock that’s still hanging out on your shelves without selling fast or at its full market price. Unfortunately, the longer you leave an inventory aging problem, the worse it gets. There are levels to aging inventory: Inventory maturation is a natural and expected part of selling physical goods. Issues only arise when inventory sticks around for too long, which is usually around 120+ days after the stock arrives in your warehouse.
Inventory age can guide your promotions. When the stock has been in your warehouse for 120+ days, it’s a warning signal you need to take action. You can trigger special sales during this period to recoup your investment and avoid long-term storage fees. Furthermore, tracking inventory aging helps pinpoint overstocked products, so you can find out why shoppers aren’t buying them, then work to fix the problem and improve conversion rates. Inventory aging data allows you to make informed choices about the next steps in your store. For example, it can help you decide whether to expand a range or discontinue it.
Because the truth is, the world of e-commerce moves fast. And with inventory aging by the minute, today’s retailers are losing out on an eye-watering $1.1 trillion per year due to inventory distortion. (Ouch!) The good news is, once you know what inventory aging is and how to calculate it, you can successfully avoid many of your biggest stock-related issues.
Why is Aging Inventory Management Important for Profitability?
Inventory aging isn’t just an annoying problem you can put off for later — its effects can have far-reaching consequences like sky-high warehousing costs, poor cashflow, and stock depreciation. It’s vital to stay informed on inventory aging in your business because it allows you to identify your top-performers and ensure you stay stocked up. Tracking stock aging allows you to see which products are performing best so you can reorder with confidence.
For example, inventory aging is one invaluable tool to help manage your inventory. An inventory aging is similar to an accounts receivable aging, except it ages your inventory and helps direct you to potentially stale inventory. Often your first markdown is your best markdown, so an aging can help you maintain your margins. In addition, with lenders paying increasing attention to inventory age quality reporting can help you stay one step ahead and protect your cash flow. A good back office services company will have a library of effective reporting to help you sell and manage your inventory.
Creating different buckets of inventory aging can help focus you and your sales team. Older goods tend to be losing value all the time while they are increasing your storage costs. And the longer the goods are in the warehouse, the more likely they are to get lost or to occupy more pallet positions. Newer inventory is usually stacked high. Older inventory tends to be broken up. When done correctly, prioritizing your valuable products and timely cycle counts can enable you to cut the dollar value of your inventory levels by up to 50%.
Calculating Average Inventory Age
How to Calculate Average Inventory Age
Aging inventory is a term for goods that haven’t sold quickly or haven’t sold for their suggested retail price. Retailers track aging inventory because once an item has reached its threshold and remains unsold (i.e., after six or more months), that merchandise likely needs to be marked down to clear out your dead stock and bring in new products. Generally speaking, the faster a brand can sell through its inventory, the greater its potential for profitability.
To calculate average inventory age for your business, follow these steps:
- Calculate the total Cost of goods (COGS) in your inventory.
- Divide the total cost by the number of items in your inventory to find the average cost per item.
- Multiply the average cost per item by the number of days each item has been in your inventory. This will give you the total inventory age for all items.
- Finally, divide the total inventory age by the number of items in your inventory to find the average inventory age for your business.
Here’s an easy example to illustrate the calculation of average inventory age for a retail store:
Let’s assume that a clothing store has the following data:
Cost of goods sold (COGS): $200,000
Total items inventory: 4 units
Average Inventory Cost: ($200,000/4 units) = $50,000
To calculate the average inventory age, we will use the formula:
Average Inventory Age = (Average Inventory Cost / COGS) x 365 days
Now, plug in the values: Average Inventory Age = ($50,000 / $200,000) x 365 days
Average Inventory Age = 0.25 x 365 days
Average Inventory Age = 91.25 days
In this example, the clothing store’s average inventory age is 91.25 days, which means it takes approximately three months for the store to sell its inventory. This information can help the store make better purchasing and pricing decisions, manage inventory levels, and reduce the risk of obsolescence.
Importance of Discovering Aging Inventory
An inventory aging analysis is essential for maintaining your business’s health and wealth. It allows you to improve your storage cost efficiency, optimize your inventory control strategy, minimize excess inventory, and maximize your cashflow simultaneously.
Understanding Inventory Aging
Benefits of Inventory Aging Reports
Leveraging the inventory aging formula and/or an inventory aging report is vital to your business’s health and wealth. That’s because an inventory aging analysis is a powerful resource designed to improve your storage cost efficiency, optimize your inventory control strategy, minimize excess inventory, and maximize your cashflow at the same time. Aging inventory is a popular metric among product-based brands because it offers exceptional visibility into your stock and allows you to make inventory adjustments as needed. Read on to learn more about the importance of calculating aging inventory and how this method can enhance your entire inventory management strategy.
Optimizing Inventory Strategies
Disjointed sales and inventory can cost you: Inventory aging ismore common in stores whose sales pace and stock levels aren’t synchronized. It’s vital to implement a system that considers your sales velocity, plus important contributing factors like cyclicality and seasonality when making inventory forecasts to avoid expensive mistakes.
Cutting Back on Storage and Maintenance Costs
But thanks to aging inventory calculations, retailers can pinpoint exactly which items are incurring greater carrying costs or holding fees as they remain unsold. From there, business owners can more easily get rid of aged stock to make sure their cashflow is unimpeded.
Detecting Aging Inventory
Manual Inventory Tracking
One way to detect aging inventory is through manual tracking. This involves regularly reviewing your stock and identifying items that have been sitting on the shelves for too long. While this method can be time-consuming, it is essential for businesses that do not have access to automated inventory tracking systems.
Automated Inventory Tracking
Another method to detect aging inventory is through automated inventory tracking systems, which can provide real-time data on your stock levels and help you identify slow-moving items more efficiently. These systems can also generate reports that highlight aging inventory, allowing you to take action before it becomes a significant issue for your business.
Inventory Aging Analysis and Business Health
Aging inventory analysis is crucial for maintaining the overall health of your business. By identifying slow-moving items and addressing the underlying issues, you can improve your storage cost efficiency, optimize your inventory control strategy, minimize excess inventory, and maximize your cashflow.
Using Inventory Age to Inform Inventory Management Strategy
Minimizing Excess Stocks
By understanding the age of your inventory, you can minimize excess stock and reduce the costs associated with storing and maintaining these items. This not only frees up valuable warehouse space but also ensures that your cash flow is not tied up in slow-moving products.
Improving Purchasing Decisions
Inventory aging data can also help inform your purchasing decisions. By analyzing which items have a higher tendency to become aged stock, you can adjust your buying strategy to prioritizefast-moving products and avoid overstocking on items that may not sell as quickly.
Enhancing Inventory Management Strategy
Using inventory age to inform your inventory management strategy can lead to numerous benefits, including improved stock turnover rates, reduced holding costs, and increased profitability. By focusing on optimizing your inventory levels and making data-driven decisions based on inventory aging, you can ensure that your business remains competitive and profitable in today’s fast-paced retail environment.
Aging Inventory and Its Importance for Retailers
In conclusion, understanding and managing aging inventory is essential for maximizing profits in retail. By calculating average inventory age, detecting aging inventory through manual or automated tracking, and using inventory age data to inform your inventory management strategy, you can minimize excess stocks, improve purchasing decisions, and enhance your overall inventory management process.
Remember, the key to retail success lies in the right inventory management. Stay informed on inventory aging in your business, make data-driven decisions, and watch your profits soar.