A CPA ANALYZES THE COST OF CARRYING SLOW-MOVING INVENTORY INTO THE NEW YEAR

Why holding onto these parts actually costs you money.

Inventory is held in order to have goods available for sale and is a primary component of determining gross profitability on sales.

As a result, the higher the ending inventory, the higher one’s gross profit, net income and corresponding income tax. Unfortunately, with inventory there is a cost above and beyond its purchase price and it is commonly referred to as the "carrying cost of inventory."

The carrying cost of holding slow-moving inventory consists of warehousing space, insurance, funds required to make the purchase, personnel to continually count the inventory (not relevant in auto industry), and obsolescence with the potential risk of theft.

Hence, reducing one’s inventory, in particular one that consists of obsolete components, end-of-life buys, order entry errors, slow-moving parts and mis-forecasted quantities is of vital importance not only to the bottom line, but to working capital if those items can be readily converted into cash.

Example: Selling $50,000 In Inventory Nets Over $20,000 In Extra Revenue
Here is an example of a dealership that sold $50,000 worth of obsolete parts inventory at 50 cents on the dollar. Take note of the extra $18,750 cash generated and the $6,250 in income taxes saved:



Conclusion
By disposing of slow-moving inventory, one can increase a business’s cash flow and have those funds immediately available to acquire equipment, distribute to owners or employees, or pay down other debts.

Analysis provided by Greg A. Rogers, CPA, October 2011. Mr. Rogers is the owner of Rogers Financial Services, a full-service Certified Public Accounting firm headquartered in Oregon City, Oregon providing assistance to individuals, corporations, partnerships, estates and trusts since 2006.