When does Inventory Ever Go Down? (Bad Case)
author: Lee Buttolph
I did some bookkeeping consulting for a subscription box company similar to a Birch Box once. They sold box subscriptions on one to six month basis. Each month they would purchase inventory for that month’s boxes.
Funny thing, at the end of 12 months (they were a start-up) they had over $30,000 worth of inventory in stock. They should end each month with near zero inventory on hand instead of $2500/month.
Okay, I can understand why they would over order. They would get better discounts with the higher volume and they would make more money per subscription box.
I kept warning them as their interim bookkeeper that they must get their inventory down. They needed to look at that inventory as dollar bills laying on the shelves. And it would have been easy to get the inventory down. Maybe not in a single month but over the course of a couple months it would have been doable.
1. Start taking the inventory and substitute it into the boxes for brand new inventory,
2. Offer one-off boxes for a discount to move out the inventory or
3. Sell the inventory on Amazon a piece at a time.
This would have given them back $30,000 in cashflow to do more marketing to expand the business. Or hire another employee to build strategic partnerships OR… stave off bankruptcy in case of a downturn in sales.
And this is exactly what happened. This company had a huge one month drop in sales and they all of a sudden didn’t have enough money to buy inventory for the next month’s boxes and pay overdue invoices. The approximate amount they were off… $30,000. Now this was just a coincidence but it shows how much money people have laying on their shelves in the form of inventory.
The company ended up folding and had to be sold to a competitor for their email list. The inventory was sold to a wholesaler for pennies on the dollar instead of getting near full value if they had done one of the three options above.
All that was necessary to make this happen was a will of the founders to make the decision to reduce inventory and then the will to see it through or better said “...when does inventory ever go down? When the boss says so.” (1)
Continued on a good case blog post.
(1) Bruner, R. F., & Yemen, G. Robb Fitzgerald at Comvia Networks.