Average Age of Inventory: Overview, Calculations

Average Age of Inventory: Overview, Calculations

This means that the inventory that is used first for any item you carry is the inventory that first arrived in storage, i.e., your oldest inventory. For example, suppose you offer a 5-year warranty on your product but by the time you produced this product for your customer, the gasket used was 2 years old. With a shelf life of 3-5 years for the rubber, the product may fail for your customer within 1-3 years because of the gasket’s age. Having the right tools to gauge and monitor aging inventory means you can respond to slower sales before it becomes a real problem. Inventory Planner is one program that let you see what your FIFO is and what is aging, all at a glance. Assuming you manage your stock using a first in, first out (FIFO) strategy, the items received longest ago will the first ones to fulfill customer orders.

Using your sales and purchasing records, you’ll be able to identify your best-selling products. Inventory management is one of the essential parts of running a business. You must know how much inventory your company has and whether or not it can satisfy customer demand. Keeping track of age on an item helps managers make better decisions about what products are worth keeping in stock. Identifying those inventory items with a slow turnover rate results from dividing your average inventory cost by the cost of goods sold, then multiplying it by 365. A high average age means a product takes longer to sell, while a low average age reflects high turnover—and a need to restock accordingly.

  1. Not only does this improve inventory accuracy, but it can provide visibility into what stock items aren’t moving (leading to better inventory control).
  2. Simply put, storing excess inventory is bad for business; not only does a product surplus signal ineffective inventory management, but it’s bound to have a negative impact on your revenue, as well.
  3. For example, if a company’s average inventory cost is $100,000 and its COGS for that inventory is $500,000, the average inventory age would be 73 days.
  4. While the metric can be used as a measure of efficiency, it should be confirmed with other measures of efficiency, such as gross profit margin, before making any conclusions.

Having a business where your products are flying off the shelves is one of the best feelings. There’s not enough demand for them, so it costs more to store them than if we sold that product at a total price. It also diminishes our profit margins because we’re paying storage costs on aged inventory all this excess inventory. Identifying slow-moving inventory is the primary purpose of an inventory aging report. Tracking the average life cycle of items in your product line-up makes it easier to see when a given inventory item isn’t performing and may require extra attention.

Best Stock Management Software for Small Businesses

Holding inventory audits regularly ensures that your stock records accurately reflect what is in your warehouse. This increases inventory accuracy and clarifies which stock items aren’t moving. Products that have reached the end of their product life cycle but have yet to be sold constitute excess inventory. A product surplus not only indicates inefficient inventory control but will also negatively influence your income.

With an aging report and proactive smart measures, it’s possible to get rid of your aged stocks—100%. WIt becomes ” aging when a company has not sold its inventory; it becomes “aging.” If an item is unsold after six months or more and the retailer wants to make room for new things, they will need to mark down prices. If you conduct sales online, take a look at your product detail page (PDP). Use this as an opportunity to freshen up website copy before directing more traffic to the page. If you conduct sales in-person, apply this methodology to your retail merchandising strategy to make sure your products have the right prominence to customers. The average age of inventory tells the analyst how fast inventory is turning over at one company compared to another.

Inventory control is rooted in overseeing the supply, storage, management, and distribution of your stock. Typically, inventory control and warehouse management includes techniques to prevent overselling, stockouts, and delays within your replenishment schedule. And when you incorporate aging inventory calculations with said techniques, you can easily optimize your inventory control strategy. To summarize, maximizing an aged inventory report has a major impact on your business. A greater understanding of your stock opens the doors to more efficient inventory management. A product’s ROI may be determined by the main metrics highlighted in aged inventory reports about your oldest items’ condition and status.

How to Calculate Aging Inventory To Improve Inventory Planning

They then use this information to decide better what products need to be kept in stock and when it’s time for a new shipment. It helps you store items more efficiently, improve inventory control strategies and minimize excess stock while maximizing cash flow. The inventory turnover formula is the cost of goods sold to average inventory.

Can Inventory Aging Be Avoided?

And they can switch suppliers before overstocking damaged goods or redesign a higher-quality version of the product. That way, they’re not stuck accumulating carrying costs that’ll wreck margins and lower their gross profits. By identifying aging inventory, you can prevent tying up more capital in slow-moving SKUs. Or maybe even unclog cash flow by eliminating unsellable products from your offerings. This empowers you to get ahead of the problem before those products turn into dead stock.

Proactively incorporating inventory patterns like this can help prevent the accumulation of aged inventory. Company B reports an average inventory of $100,000 and COGS of $1,500,000. Company A reports an average inventory of $200,000 and COGS of $1,000,000. Matthew Rickerby is the Director of Digital Marketing at Extensiv, the leading solution for multichannel, multi-warehouse D2C brands. For the past ten years, he’s covered ecommerce topics ranging from conversion rate optimization to supply chain management. Demand trends tell you how well a product performs by honing in on fluctuations in consumer demand and buying patterns from your customer base.

Improve Stock Replenishment

A “good” inventory age is generally considered 60 to 90 days from the receipt date, though this varies based on the shelf-life of the products, industry norms, and the average turnover rate. Aged inventory refers to slow-moving products that either aren’t selling or are selling slowly. The average age of inventory helps purchasing agents make buying decisions and managers make pricing decisions, such as discounting existing inventory to move products and increase cash flow. As a firm’s average age of inventory increases, its exposure to obsolescence risk also grows. Obsolescence risk is the risk that the value of inventory loses its value over time or in a soft market.

Additionally, the average age of inventory can influence decisions on creating marketing strategies, such as offering discounts and promotions, selling aging inventory, and increasing cash flow. If the average age of inventory gets very high, then the inventory is exposed to obsolescence risk. Beyond being merely unsold stock, https://1investing.in/ intertwines with several critical areas of a business, from cash flow dynamics to storage costs and even product relevance over time. When diving into an ecommerce store’s financials, aged inventory can help guide where further analysis is needed to understand why certain products aren’t selling as quickly as others. This can be viewed alongside other ecommerce metrics like conversion rate, cart abandonment rate, inventory turnover, and product page views to understand an ecommerce store’s performance better.

To generate demand, take active actions such as marketing promotions, bundling, or discounts. Most businesses consider goods lying around for more than six months or 180 days to be dead stocks. However, if inventory turnover is too high, it can be a sign that the company is selling inventory too quickly and may experience inventory shortages. Inventory shortages represent lost sales and are extremely detrimental to a company’s profitability. Please note all inventory-related formulas or costs are usually calculated for a time period be it a week, month, or year.

Slow-moving inventory has a lower sales rate but still can sell, whereas dead stock refers to products that are unlikely to sell and should be disposed of or written off. Demand trends provide information about how well a product performs by focusing on swings in consumer demand and purchasing patterns from your client base. You may have had a product that sold well in the first six months after its release, but it didn’t sell much in the second half of the year. Routine inventory audits should be performed to identify old or slow-moving items. Monitor product sales volume and identify slow-moving items as soon as possible.

Discovering aging inventory before it becomes dead stock is the best course of action. But walking up and down the aisles of your warehouse won’t help you figure out what these products are. High overheads and shrinking profit margins are common outcomes of inventory aging. The best way to sell these products is to lower their price and reduce your profit margin. When it comes to data-driven decisions, the best thing you can do is use inventory reporting.

We also searched for patterns in types of discriminatory practices being addressed. Since this problem didn’t start overnight, it’s not going to resolve overnight either. However, there are both long term steps and more immediate steps you can take to get your aged inventory under control. It is very likely that your inventory has a certain usage limit in terms of time.