Retail Dogma

Aging Inventory: How to Read The Report & Act on It?

Aging inventory report is one of the most important reports to keep track of when it comes to inventory management. The report lists your total stock on hand and segregates it by age into “age buckets“. These buckets can be every 30 days, but typically they are listed every 90 days and would look like this:

  • 0-90 days (i.e below 3 months)
  • 91-180 days (3-6 months)
  • 181-270 days (6-9 months)
  • 271-360 days (9 months to 1 year)
  • 361-540 days (1 yr to 1.5 yr)
  • >540 days (above 1.5 yrs)

The stock on hand is measured at cost value of the stocks. Then another field would reveal the percentage of each bucket to the total stock on hand.

What is Aging Inventory?

Aging inventory is the inventory that has been received and trading for a long period of time (typically 6 months & above for fashion). The reason age is tracked is because once the threshold of that period is reached (e.g 6 months) this merchandise needs to start being marked down at higher rates, in order to be able to clear it and bring fresh merchandise in place.

How To Read the Aging Inventory Report?

Aging Inventory Report

When you look at your inventory aging dashboard, you examine each age bucket (e.g 3-6 months) and how much it contributes to your total stock on hand.

Ideally you want to have most of your stock in the first 2 buckets, i.e below 6 months. This means you have more fresh stocks than aged stocks, and also means that most of your stock is selling at full price or higher margins.

It should also be noted that your stock keeps shifting into older buckets as time goes by. Therefore, having the visibility of how much stock you have under each bucket will also give you a heads up on how much inventory is about to get aged and enter the next bucket within 3 months.

You then start to look at the buckets at higher age and how much they are contributing to your stock mix and use this knowledge to manage your aging inventory.

How To Manage Aging Inventory?

Once you have identified the aged stock from the aging inventory report and the age buckets of this stock, you will start marking down your products based on the age bucket they belong to.

It is very important to apply the discount gradually and not just give a flat discount on everything, because when you give higher discount on more aged stocks you will make it more attractive to customer and this automatically ensures clearing those stocks faster than the newer ones.

This gradual discount also ensures you are making the most money out of your stock, by not giving unnecessary discounts on stock that is not too old yet.

Example

Stocks that have just passed 6 months will be given the least discount, for e.g 25%, while stocks that are above 1 year will be given the highest discount, e.g 70%.

You must have also noticed from the above report that some stock is selling at negative margins. Yes, be prepared to lose money on some of your stocks just to be able to get rid of it and buy new stocks. In fact this happens all the time for retailers and it is a common practice.

This is because at this point, generating cash from this inventory is more important than not losing money on it. A stock that has been in your warehouse/store for more than 1.5 years has already been subjected to different levels of discount by that time and is still there, so the best option for that stock is to either sell it at loss or write if off completely to get it off your books and buy new merchandise instead.

Why Is It Important To Track Aging Stock ?

Keeping track of aging inventory is important for the following reasons:

1. It Affects Cash Flow

Managing your cash flow is very important, because this is what pays your bills and what keeps your business alive. Also this is the cash you use to buy new merchandise, so when you have too much cash tied up to your old merchandise and not being turned over this is a problem.

2. It Affects Profit Margins

The more inventory you have at higher age, the more discounts you have to apply on this merchandise to sell. This of course will reduce your gross profit margins and consequently your business profitability as a whole.

Use our profit projection tool to plan how much profit you will make this year

3. It Incurs Warehousing Costs

Holding stocks actually costs money. The more stock you have, the more warehousing fees you will incur. This is something you need to take into consideration while deciding on the discounts you have to give on aged stocks or when selling this stock at loss. That’s because keeping this stock idle is actually losing you money as well, so it might be better to just get rid of it at any price.

4. It Affects Product Freshness & Newness

Product freshness is what drives both, sales and profitability. The more newness you introduce into your stores, the more traffic you will get from customers who are interested in buying latest trends at full price, rather than bargain hunters.

As mentioned before, having a lot of cash tied to old stock automatically means less cash available to buy fresh merchandise. Basically your OTB will be locked until you clear the old ones and have more money available for buying.

Read more: Open To Buy: The Complete Guide

5. It Affects The Balance Sheet

Your inventory is an asset, and it could be even your biggest asset. When stock gets aged its value on the balance sheet needs to be adjusted to reflect its real value. This is called stock obsolescence provision.

It basically means that a product that costs 10$, but has been there for 2 years is no longer worth 10$. That’s because if we try to liquidate it right now, chances are we have to sell it at loss, e.g 6 $ or even write it off at 0$. In this case its value on your balance sheet has to be reduced (according to provision norms) from 10$ to 6$ or 0$ respectively ,and hence the value of your entire business will also be affected.

Read more: Retailer’s Balance Sheet Explained

How To Improve Aging Contribution ?

Your aging stock contribution can be reduced in the future by applying the following practices:

Actually the best way to ensure a healthy stock mix and consequently a healthy balance sheet, is by giving great attention to your buying decisions.

Read more on why we believe buying is the most important retail function