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Your company's inventory could be at the core of what you do. Your inventory might play a supporting role in keeping you and your customers moving forward. For a lot of businesses, inventory is often recorded at what you paid for it and sits on the balance sheet until it's sold. Naturally, this occupies a lot of your operating capital. It's important to value these items appropriately to allow you to make the best decisions on the overall financial strength of your company. This data is also key for the daily decisions on how — and when — to use your inventory. The consequence to overvalued inventory will result in a need to create an inventory reserve to reduce the value in your financial statements.
With this in mind, the following lists five cases that can help you decide if inventory is worth what you think it is:
If you've been looking at the same pile of inventory for the last year, it's worth considering its realizable value. In this case, there's the potential of writing it down to a value relevant in the world today.
We plan the obsolescence of many products we use on a daily basis. If it's snuck up on you and your high-tech inventory has been outstripped by a new wave of innovation, take the hit on that inventory now. That should help you make decisions on a more realistic picture of your warehouse.
How many plastic straws do you have on hand? The market changes quickly. Between consumer tastes and needs or changes in the political landscape, these changes can have a huge impact on the value of your inventory. Most business leaders have a keen sense of the political and social temperature in their marketplace. It's wise to keep your ear to the ground and ensure your inventory value is up-to-date and on hand to get ahead of these changes.
Getting a good deal buying in bulk can give you the upper hand in a stable market. Can you use this inventory when you roll out production though? If your budget doesn't require you to use these items, consider decreasing their value or cashing in on what you can get for them at today's rates.
You're progressive, effective, and dynamic in your industry. Celebrated for being responsive to your customers, by either following or leading them into the great unknown. If you have a strategic shift in your company, is it worth taking what's in your warehouse with you? Align your inventory with your strengths, weaknesses, opportunities, and threats. After that, consider the value and necessity of anything that doesn't fit inside that framework.
If these sound like issues you're facing and you would like to discuss the accounting treatment, valuation methods, and tax implications of an inventory reserve, contact our Manufacturing team. We'll work with you to find the best solutions for your business.