How to manage dead stock

Slow stock still sells, just not often. Dead stock has effectively stopped. business.gov.au's cash flow advice suggests clearing out stock that has stopped selling, has passed its date or no longer has a use.

Write down your own rule, because what is dead for a florist is very different from what is dead for a hardware store. A rule might combine:

• no sales since the last stocktake, or over a period you choose
• past its use-by date
• a discontinued product, or a part for equipment customers no longer use
• seasonal stock left over once the season has ended
• damaged goods that can't be sold as new.

Setting your latest stocktake counts against sales since the previous count, as business.gov.au suggests, shows which items haven't sold at all. If your system records the last sale date for each item, a report sorted by that date does the same job between counts.

Valuing the list at cost shows how much cash is sitting on the shelf with no prospect of coming back at full price. The reason column matters as much as the value, because it decides both the fix and how to stop it happening again.

• Return it to the supplier. Check your agreement with the supplier first; some accept returns of unsold or faulty goods for a credit.
• Mark it down. In business.gov.au's glossary, a markdown is a promotional discount, commonly used to clear surplus or discontinued lines.
• Bundle it with something that sells. business.gov.au lists bundles and packages among common kinds of discount.
• Hold a stocktake sale. business.gov.au suggests one to bring stock levels down before a count, and to sell goods before they go out of season or out of date.
• Use it in the business, if it has a use there.
• Dispose of it, when it can't be sold or used, such as expired food or broken goods.

When discounting, business.gov.au points out that discounts affect your bottom line and suggests making sure they still let you cover your costs and meet your goals. For dead stock the purchase cost is already spent, so the real question is whether the price you can get beats holding the item longer.

Each choice leaves a different trail in the records:

• A return: record the goods going back to the supplier, and the credit note against that supplier's account when it arrives.
• A markdown or bundle: change the selling price in the item list before the sale, so each sale records at the new price.
• Stock used in the business: record it as a movement out, with the reason.
• Disposal: record the quantity removed, the date and why, and keep a note of who approved it.

Then bring the item list up to date, so the next count starts from figures that reflect what you did. Ask your accountant how stock you mark down, return or throw away should be valued in the accounts.

Stock is easiest to clear while it still has some appeal. Seasonal goods sell better at the end of the season than at the start of the next one, and products near their use-by date sell better before it than after. Among the uses of stocktake results, business.gov.au lists putting slow-moving items on sale and retiring lines that aren't selling well.

There is a cash reason to move quickly too. When debts are growing, business.gov.au suggests selling old or excess stock as one way to bring money in.

• Note the reason for every dead stock item, and look for repeats at each review.
• Order new or untested lines in small quantities until they prove themselves.
• Lower or remove the reorder point for any item that is declining.
• Plan seasonal buying to run down towards the end of the season.
• Check deliveries for damage on arrival, while a claim on the supplier is still practical.
• Consider buying some items only when a customer orders them, which business.gov.au suggests as an alternative to keeping stock on hand.