On its face, having excess inventory doesn’t seem like a bad thing. In some situations, a certain level of excess stock is beneficial to a business.
For example, if your products have long lifecycles, you may want to order more than you think you can sell to save on ordering costs. It can also let your fill customer orders quickly and decrease your risk of shortages due to the small business supply chain.
But it can also result in unnecessary expenses and tie up capital. To manage overstock inventory, do your best to avoid it in the first place — careful planning and sales forecasts to project customer demand can help.
Here are seven reasons why it is bad to have too much inventory and a few ideas for managing unwanted surplus.
1. Excess inventory can create storage issues
If you’re holding onto an inventory of products, you’ll soon discover that excess stock takes up valuable storage space. Be wary of how much space it takes up — and find a solution for dealing with it quickly.
For example, an e-commerce company might want to capitalize on a trend and order extra products. But what happens to excess inventory if the trend fizzles out? It can cause backup and take up too much space in your storage facility or stock room.
Solution: Refresh your marketing efforts. Move slow-moving or old inventory to a different area in your shop. If the product is listed online, take new photos and write a blog about the benefits and uses of the product.
2. Excess inventory can cost you more
If you’re not able to move your excess inventory, it may accumulate and become a storage issue — and storage space isn’t free. Even worse, you must also consider the costs to keep up with your inventory:
- Storage costs such as rent, maintenance, utilities and insurance
- Employee wages to manage, audit and maintain the extra goods
- Depreciation costs as your inventory’s value depreciates over time
Additionally, having more inventory than you can sell leaves cash tied up instead of using it to invest in your business or expand operations with new hires.
Solution: The goal here is to reduce storage space. To do that, move some of your excess products to your store floor. Create new displays, identify cross-merchandising opportunities or consider lowering the item price.
3. Excess inventory can hurt the environment
Too much product impacts more than your bottom line. It can hurt the environment, too. Think about this: The inventory has a carbon footprint because it took energy and water to produce. When demand is over-estimated, carbon emissions go up and manufacturers waste resources — not to mention the excess that may end up in a landfill.
Better business forecasts can reduce the waste of energy, material and money on needless inventory. Businesses need to be mindful of their footprint on Earth and avoid creating excess waste whenever possible.
Solution: Carefully plan and forecast your inventory and product needs. Review past sales reports and look for seasonal trends and other patterns before ordering new items.
4. Excess inventory can tie up cash flow
Cash flow is the lifeblood of any business. It is important to keep cash flowing to invest in the future. Too much inventory ties up cash flow and can hurt your business.
For example, let’s say you own a bike shop and invested in several items of performance jerseys, shorts and other bike clothing and accessories.
But your sales aren’t as high as you’d hoped, and you’re not seeing a return on the cash you spent to buy the items. With your money tied up in products, your cash flow can suffer — you may not have the funds to cover the company’s day-to-day expenses.
Solution: When cash flow is an issue, a sales event can attract customers — and their cash — to your store. A flash sale can create a sense of urgency, while a store-wide event can draw large crowds to your store.
5. Excess inventory can lead to stock obsolescence
The idea of having too much inventory is nothing new. It's a problem that has existed for as long as there have been businesses. But you need to act fast so it doesn’t sit too long and become obsolete.
Technology retail is a good example. Suppose you sell computers or electronic items. You ordered plenty according to your sales forecast, but a new model was released before you could sell off your inventory. In this case, your items have become devalued or worse — obsolete.
Solution: You need to act fast — but how to sell excess inventory? You might liquidate it online at places like eBay or Amazon Marketplace to make room for new products and to capture as much profit as you can.
6. Excess inventory can cause stock degradation and waste
Too much stock usually means you have low inventory turnover — your products aren’t selling as quickly as you forecasted. Why are large amounts of inventory considered wasteful? Excess inventory doesn’t last forever. Items will degrade and lose their value over time. In fact, it’s a common retail business insurance claim.
Solution: To avoid stock degradation, you must be very careful about forecasting inventory needs. Too much can lead to waste as the products deteriorate and lose their value.
7. Excess inventory can reduce profits
Excess inventory can cut into your profitability. If you’re sitting on a ton of product, you may be tempted to cut prices to sell off that excess stock. You may move some products, but you’ll also likely reduce your margins and make less profit overall.
While selling items to capture a partial profit is better than no profit at all, you’re still adding stress to an already difficult situation.
Solution: Rather than offer steep discounts, introduce product bundling. Group complementary products together and sell them for a slightly lower price than what they’d cost separately. You’ll start to move merchandise without a huge drop in profit.
How NEXT helps small businesses protect their inventory
Having too much inventory on hand is a double-edged sword. Too much can make it difficult to turn a profit, but having too little can be just as harmful.
Business insurance can help, too. Keep in mind if you run a business out of your home, your homeowners insurance typically won’t cover business-related damages. But business personal property insurance, which is part of commercial property coverage, can give you peace of mind if you find yourself with too much product on hand.