When Your
Stock Becomes A Liability.
Over the years, I have seen Entrepreneurs who are seemingly
inventory rich and cash poor. Obviously from the Accounting point of view,
Inventory is an asset but the challenges of too much inventory could make it
become a liability!
With the appreciable technological advancement being
experience globally, most markets are becoming more active in the e-world. So,
for instance, a Publishing company sitting on large volumes of hardcopies may
be sitting on a gun power! Because of the introduction of e-books and e- libraries
and an increasing numbers of “Smart users/Customers”.
Furthermore, with the advent of Tower fans that have remote
controls and could be synchronised with the User’s smart phone, it will be
unwise to stock your warehouse with the traditional oscillating fans collecting
dust, knowing fully well that one of the factors that causes a change in demand,
is changes in taste and fashion.
In fact, sometimes in my working
experience, because of the large volumes of stocks we had, we moved from one
small warehouse to a bigger one and we were later confronted with a decision to
move on to a much bigger warehouse or build a giant and purposeful warehouse at
an enormous cost. All of these, because of the increasing volume of our stocks
and the need to satisfy our customers’ demand but the top management was
unwilling because of its cost implications.
At that point, it was disturbing to observe that sometimes
holding cost of slow moving inventories could be higher than their prevailing
market price and thus become a liability to the Enterprise!
Therefore, for the following reasons inventory could become
a liability:
1.
When it reduces the liquidity of the
enterprise. The more you stock up your inventory, the less liquid is
the enterprise. The cash of the enterprise are trapped in stock and the company
begins to have challenges in meeting its daily financial obligations.
2.
When it consumes either or both the physical
and administrative resources of the enterprise. As the volume of stock
increases, the top management may be compelled to secure a bigger warehouse and
engage more security personnel to prevent frauds, pilferages or outright theft
and this would have a direct consequent on the firm’s physical and
administrative resources.
3.
When its value decreases as long as it stays
in the warehouse. There are some items of stock whose value diminishes as
they continue to sit in the warehouse, particularly the perishable items of
stock. More so, inflation and other economic indices could also cause an
unanticipated decrease in the value of stock idly sitting on the shelves in the
warehouse.
For
more on Inventory management call: 07088862700 & 09020002930.
