What is Stock Obsolescence?

Stock obsolescence happens when inventory has been sitting on a company’s books for a very long time (e.g 2 years) without being sold, which renders it unsalable.

The rationale behind it is this: If these products have not been selling after all this time and all the promotional events that any typical product goes through in their lifecycle, then these products will likely never be sold and should be considered obsolete.

Why is It Important ?

Stock obsolescence can affect your profitability, since the amount written off will be recorded as an expense. The value of this stock gets written down once it hits the time limit specified in your provision norms and this amount will be recorded as an expense and the asset value equivalent to it will be taken off your balance sheet by adjusting the value of ending inventory.

Since inventory is usually a retailer’s biggest asset, if the situation gets out of hand due to poor inventory management, the proportion of obsolete stock can be very high, and consequently the amount lost with the write off. That’s why you should be proactively preparing for and managing stock obsolescence to be able to make the best out of the situation.

Another problem with letting inventory buildup is that it locks your cash, so you are not able to buy fresh stocks that will drive your top line. Actually a high amount of obsolete inventory is a sign that the company has very poor inventory management process and is considered a red flag in retail. 

More Resources

Thank you for reading this article on Stock Obsolescence. We recommend the below free resources as well:

• Inventory Management Guide
• Sell Through Rate
• Aging Stock

Read more articles on Merchandising or join the academy and take our in-depth course on Merchandising & Inventory Management, which shows you the best practices and the different reports to generate and use to manage inventory.