5 Metrics To Consider When Writing Your Inventory Off The Books

It is this time of the year when we need to take inventory of our stock! Product counts started, and the decision about what to write off as an expense this year must be made soon. The decision should be as objective as possible for two reasons:

1. We do not want to write off any inventory that may generate future sales.
2. We want to have strong prove to IRS that the inventory we wrote off was obsolete and has little if no chances of selling. Otherwise, the IRS may treat it as tax evasion.

Because of that, our analysis needs to include some objective metrics. Below are some suggestions:

1. YTD units sold – quantify how many units you sold this year, find items that are not selling well.
2. YTD units quoted – know what market says. This metric is a critical one as it is a signal from the market that the item is in demand. Even if the quotes did not convert into sales orders, YTD units quoted metric might suggest that the market says that a particular item is sellable.
3. Units on open sales orders – you cannot write off anything that is on active order!
4. Units on open purchase orders– if you placed PO for a new delivery, it probably means that the item is not obsolete.
5. Quantities received in last x months / x quarters – depending on how fast your inventory is moving and what industry you are in, you may run a receiving report and check what items were received.

As usual, make a data-driven decision, and you will be just fine!