Slow-Moving Stock: How It Distorts the Value of a Business

On the balance sheet of a trading company, goods that do not sell stay at their full cost, year after year, until somebody decides to write them down. The ledger does not know that these cartons have not moved for eighteen months, because it records what was bought, not what can be sold. So a prospective buyer sees a comfortable figure in the stock report and finds out after the deal that a good part of it is shelf space holding memories rather than saleable goods.

Why the books do not show the problem

Stock is normally recorded at purchase cost and stays at that cost unless an accounting adjustment is made. When to reduce the value of slow stock, and by how much, is an accounting decision for your accountant or auditor, governed by the accounting rules you follow. What a count on site can do is supply the facts that decision rests on: what is there, in what quantity, in what condition, and how long it has been since it moved.

How a count reveals it

During a count, signs appear that an experienced counter notices and that no statement shows:

• A layer of dust on the lower cartons, and packaging that has faded or changed shape.
• Old models, packs in a design that is no longer produced, or goods from a past season.
• Pallets at the far end of aisles hidden behind newer goods, and aisles that nobody has walked.
• A quantity that has not changed since the previous count.
• Near or past expiry dates, or labels in a language or for a market you no longer sell in.

It is good practice for the team to record, for each large item, the date of the last dispatch, and to put items into age bands: up to 90 days, 91 to 180, 181 to 365 and over a year. The bands turn a vague impression into a table that can be discussed.

A worked example (conditional figures)

The books show stock worth 600,000 dollars. After the count is tied to the movement records, the stock splits as follows:

• Up to 180 days since the last dispatch: 380,000 dollars.
• 181 to 365 days: 130,000 dollars.
• More than 365 days: 90,000 dollars.

The seller says the whole stock is "good merchandise". But the oldest band, worth 90,000 dollars, has not shipped for a full year. If the accountants and the buyer judged that it would sell for only about 30 percent of its cost, an assumption made for illustration only, the value would fall by about 63,000 dollars, a little over 10 percent of the declared figure. If the price is linked to the value of net assets, that difference passes straight into the price of the deal.

Slow is not always dead

Do not judge every slow item as dead. Some goods are seasonal by nature: winter supplies, back-to-school items, food for festivals and the month of Ramadan. They can look stagnant out of season and sell well in their time. Last year's sales show the difference: ask for monthly sales of each large item over 12 months and compare them with the quantity on hand. If an item sells 20 units a month and 1,200 are in the warehouse, that is 60 months of cover, five years, which is far from seasonal. If sales were concentrated in two months and the balance covers only the coming season, the picture is quite different.

Questions to put to the seller

• When was the last unit of this item sold, and to whom?
• Why was it bought in this quantity, and was a campaign planned that did not happen?
• Has it been offered at a discount, and with what result?
• Can it be returned to the supplier or exchanged?
• Is it pledged or reserved for another party?

Write the answers down. If the seller hesitates, that in itself is information, and a frank answer raises your confidence in the rest of the figures.

In short

Slow-moving stock does not cancel the value of a business, but it changes its true size, and it can be found if you look: by counting on site, by age bands and by setting quantities against the sales of past months. WarehouseDepo handles this field part for investors: it counts the stock, records its condition and the date of its last movement, and hands your accountant and adviser clear facts on which to base their estimate.