Inventory Aging: Definition & How to Calculate
How to Calculate Inventory Aging To Improve Inventory Planning
Having a business where your products are flying off the shelves is one of the best feelings. But what happens when you have too much inventory, and they sit there? 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 all this excess inventory.
Inventory is one of the most important aspects to consider when running a business.
What is inventory aging?
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.
How to calculate the average aging inventory for your business?
Calculating average inventory age is an integral part of inventory management because it helps you identify inefficiencies and lost profits. To calculate your own product’s inventory turnover ratio, you need to know the average cost per unit (COGS), as well as how often products are selling out.
Know your average inventory cost
An average inventory aging estimate is a more accurate way to calculate the worth of your company’s product. Inventory values can fluctuate from month to month, so an average gives you a better idea of what it cost.
To calculate your average inventory aging cost, use the formula: [annual cost of goods sold ÷ total ending inventory]. This calculation can be helpful for eCommerce businesses because it shows how much you are spending on what is currently in stock.
Know your cost of goods sold
COGS refers to the price of producing goods. It includes direct costs, like raw materials and labor, but excludes indirect expenses such as overhead or marketing.
The COGS formula is calculated: cost of goods sold = [beginning inventory + purchases during period] – ending list. The beginning inventory points to the amount of stock you had leftover from last month, quarter or year and includes what you bought in that same time frame. The purchase figure reflects what was purchased within the designated accounting period, while your final number, which indicates how much remained unsold at the end of it all, will be called “ending” for short.
Know your inventory aging turnover ratio
One of the most critical metrics for eCommerce businesses is inventory turnover. The inventory turnover ratio measures how often a company sells and replaces its inventory during an established period, like over a year. It can help companies make more informed decisions on pricing, marketing, manufacturing, and purchasing new items.
The inventory turnover formula is the cost of goods sold to average inventory. A slow turnover rate might mean that sales are low or there’s a large amount of excess stock, while high rates imply strong sales and insufficient supplies.
Divide by # of days
The age of your inventory is the average number of days it takes to sell off certain SKUs. Analysts often use this measure to determine a company’s efficiency and profitability but occasionally refer to it as DSI (days sales in inventory).
To find the average inventory age for your products, follow this formula: [average cost of goods sold ÷ avg. Inventory] x 365= Average Inventory Age. Generally, it is recommended that retailers confirm this figure with additional metrics such as gross profit margin.
Inventory aging analysis and business health
Inventory aging is a vital tool to monitor the health of your business. It helps you store items more efficiently, improve inventory control strategies and minimize excess stock while maximizing cash flow.
Improve storage cost-efficiency
The bad news is that inventory holding and carrying costs will not go down any time soon. But, luckily for you, aging analysis can help your company avoid long-term storage fees — which will save the company a lot of money in the end.
If you use a 3PL or FBA warehouse, it’s essential to ensure that your products are rotated in and out of storage. Otherwise, additional fees will be associated with storing the product for too long.
Optimize your inventory aging control strategy
When you consider techniques to prevent overselling or delays in replenishment schedules when managing inventory, it becomes easier to optimize your strategy.
A thoughtful analysis of your inventory can help you determine what’s in stock and if it will sell before the expiration date. That way, less product is wasted.
Minimize excess inventory
Excess inventory is the accumulation of products that have been overproduced but are still being stored. It’s not just a waste because it signals ineffective inventory management, but it also will likely decrease your revenue since there is less demand for these goods.
One way to stop reordering products that don’t sell is by paying attention to your inventory. If you notice an item has been on the shelf for a long time, it might be worth taking off of the shelves.
To take advantage of the competitive market, you should introduce new items that will help increase customer orders and revenue.
Maximize your cashflow
Maximizing your cash flow is always a priority because it’s the revenue stream that will keep you afloat. When there are too many stagnant SKUs, inventory becomes an issue and prevents new investments in merchandise.
Retailers can more easily get rid of their old inventory because they know which items incur higher carrying costs or holding fees. 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.
How to use inventory age to inform your inventory management strategy
Inventory management can be improved by using various software and technologies and analytics. Trial-and-error will inevitably play into the process but integrating inventory age has benefited brands across all industries.
Use inventory age to adapt your inventory management strategy
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.
Use inventory age to understand demand trends
Demand trends help you know how well a product is doing by showing your customer base’s fluctuations in consumer demand and buying patterns. Maybe there was a time when an item sold well for six months after its release, but then it hardly moved any units at all during the second half of that year. Inventory age often suggests whether or not an item might succeed with some promotion–seasonal sales, discounts on those items, or bundling them together.
Use inventory age to inform planning
Inventory planning is a vital component of supply chain management because it helps stores purchase the ideal amount to carry and know when to reorder. The age on inventory can broadly inform this process as well, in that it determines which products don’t merit being ordered again after all. Likewise, knowing how old your inventory gives you more solid ground for making these decisions about what should be bought.
Use inventory age to make data-driven sales decisions
When it comes to data-driven decisions, the best thing you can do is use inventory reporting. With this information at your disposal, you’ll know when an item needs to be marked down or reordered without overstocking on a product that might not sell.
Frequently Asked Questions
- How often should I report on inventory age? The average inventory age is usually calculated over one calendar year. While some companies may assess this figure more or less frequently, one age analysis per year is pretty standard among modern eCommerce merchants.
The average age of inventory is calculated by taking the number of items in stock and dividing it by the total number of months that have passed. A year’s worth or a month’s worth? While some companies may analyze this figure more often, one analysis per year is standard among modern eCommerce merchants.
- What is a good inventory age? A good inventory age typically falls between 60 and 90 days from the receipt date. While a shorter time frame maybe even better, inventory that’s aged more than six months (180 days) is usually considered dead stock and should be prioritized before new products are ordered.
The good news is that a company’s inventory should fall within the 60-90 day range from receipt date.
A shorter time frame may be even better, but it also means less profit for the business, and orders of dead stock would need to come before new products are ordered.
- How does aging inventory impact my business? Aging inventory directly affects your business, as it can help you understand your stock on a deeper level. Aging inventory reports highlight critical metrics about our oldest inventory items’ health (and status) y dictate whether a particular product is a good ROI.
This means looking at aging reports and realizing which products are worth keeping in stock for their potential return on investment.
- How to manage aging inventory? If you find an abundance of aging stock, one way to address this concern is by dramatically discounting the items that fall into the ‘aged’ category. Alternatively, you can upsell or bundle those products, to hopefully move them out the door once and for all.
One way to handle aging inventory is by offering a discount on the products nearing their expiration date. Another option would be to offer an upsell or bundle with other, more popular items.