All inventory products move at their own pace due to customers' unique needs and shifting market demands. An inventory aging report, also known as aged inventory reports and aged stock reports, can help business owners to gain a better understanding of the movement of their goods.
These statements provide insight into how quickly a brand's products are selling, which management can utilize to make informed decisions about their inventory, spending, and storage.
What is an Inventory Aging Report?
An inventory aging report entails critical data regarding the speed of inventory movement. Typically, the report indicates the number of days a product stays in the storeroom or warehouse, beginning on the date it was received.
A comprehensive inventory aging report will provide key insight into slow-moving products, as well as goods that customers rarely or do not purchase at all. It also helps management determine how much money they are spending to maintain specific items in inventory for extended periods of time.
By equipping teams with this information, they will be empowered to make smart inventory purchases that will maximize profitability.
How to Calculate the Average Age of Inventory
To understand how long a brand's inventory typically stays in storage, management can calculate their average age of inventory. In order to do this, the average cost of inventory must be divided by the cost of goods sold for a given period. Then, the quotient needs to be multiplied by 365.
- Average Age of Inventory = ( Average Cost of Inventory / Cost of Goods Sold ) x 365
Organizations can effectively utilize this formula by following these steps -
1. Find the Average Cost of Inventory
The average cost of inventory can be calculated by adding the cost of beginning inventory to the cost of ending inventory and then dividing the sum by 2.
For example, if a clothing retailer has $100,000 of products on hand beginning of January 1 and by December 31, they have $50,000 of inventory; their average cost of inventory would be $75,000.
2. Find the Cost of Goods Sold
The cost of goods sold encompasses all the supplies, raw materials, and labor that contributed to the production of a product. This can be found by adding the cost of beginning inventory to purchases and then deducting the sum with the ending inventory from that period.
If the clothing company, for instance, still has a beginning inventory of $100,000 and an ending inventory of $50,000 and also made $60,000 of purchases throughout the year, their cost of goods sold would be $110,000.
3. Find the Inventory Turnover Ratio
Following the formula for the average age of inventory, the average cost of inventory needs to be divided by the cost of goods sold.
Therefore, the calculations for the clothing retailer with the cost of goods sold of $110,000 and an average cost of inventory of $75,000 would result in 1.47. This metric is also referred to as the average inventory turnover ratio and it indicates how fast a business sells and replenishes its stock.
4. Divide by 365
Finally, to find the average number of days it takes for a product to be sold, the number of days in the year needs to be divided by the average inventory turnover ratio.
So, the company with a 1.47 average inventory turnover ratio would have an average age of inventory of 248.29 days.
In context, this means that the business takes about 248 days to sell a product from their inventory. Depending on the item, this number can be considered quite high and may require further investigation to ensure that it does not become obsolete or lose value before it is sold to consumers.
Importance of Inventory Aging
Management teams can respond quickly to safeguard their bottom line when they regularly assess inventory and monitor the length of time that products sit in the warehouse. For example, if merchandise is identified to be slow-moving, the company can strategize new marketing campaigns to pick up sales.
Other benefits of performing inventory aging reports include-
Reduce Unnecessary Warehouse Fees
Excess inventory that ends up sitting in warehouse facilities can incur carrying fees, especially if the company rents storage space from third-party providers.
Additionally, the goods take up valuable warehouse capacities that faster-moving and more profitable products could have used. This can result in lost sales and potential customers.
With aged inventory reports, business teams can identify obsolete goods and remove them from their warehouse or storerooms promptly.
Ensure Inventory Goods are High Quality
The main goal for many companies is to provide goods that are high quality and contemporary. For example, grocery stores must make sure their perishable goods are sold before their expiration date and clothing retailers want to sell items that are on-trend and in-season.
With insight into the quality and popularity of their products from aging reports, managers can ensure they are meeting customers' expectations.
By understanding which inventory products are unproductive, organizations can strategize their replenishment and procurement plans to prevent overstocking. This will help them save money from extra warehouse costs and ensure that resources are allocated towards profitable inventory.