Parts Inventory on the Balance Sheet
How much is your parts inventory worth?  This is really a trick question, since it is worth of course, whatever you can sell it for.  But how much are you stating it is worth on your financial statements? How much is it really worth to your business and to your customers?  Do you have enough inventory, too much, or are you holding steady at a constant asset value?

To figure this out there are more details you need to know…

What is your inventory turn? Knowing this KPI (Key Performance Indicator) is essential to analyzing the true value of your parts inventory.  Compare it to the turn on your major unit inventory. Is it in line with your goals?

Inventory turns will help you determine the level of obsolescence that exists in your store.  Some parts will have a high turn and should be displayed in a prominent place for easy access and increased exposure.  However, the most valuable part of figuring out an inventory turn is identifying those parts that have a low turn.  Those are the pieces of your inventory that need immediate attention!

Think of it this way; a part with a low turn is like laying cash on your shelves. It won’t earn any interest sitting there, you won’t be able to pay down other debt or save interest expense with it laying there.  All you can do is hope that a customer comes along, spies the cash and offers you more than it’s face value.  That is, if someone doesn’t just steal it.

If a part has a low turn (lower than your budget), get rid of it!  Put it on a clearance table, eBay or Craigslist.  Participate in user forums where customers are looking for these type of parts.  Give your staff a gift card to a local restaurant if they get them sold this month, or price them so low you can use it as a traffic generating promotion.  Do something with them to get them off the shelves.  Save the cost of counting them over and over every inventory cycle.

Put the generated cash to better use.  If your inventory levels are in-line with your budget, use the generated cash to restock more current inventory that may be a better seller.  If your overall goal is to increase your parts turn, don’t replenish the obsolete inventory once you get rid of it.  Your overall inventory turn will increase as your average inventory budget shrinks to contain only your highest turning parts.

Businesses can be hoarders too
We have had the pleasure of being inside most of our customers’ locations.  One recurring problem we witness over and over again, is THE SCARY BACK STOCKROOM.  Most businesses have them…shipping containers/sheds/garage bays/closets/attics filled with old obsolete parts inventory.  Because the balance sheet has a “value” on these parts, no one will throw them away.

I recently watched a TV program about professional organizers that help people who are overwhelmed by their “stuff”.  I saw a correlation between those folks’ garage disasters and our customers’  scary back stockrooms.  The organizers made the participants divide everything into three categories: KEEP, THROW AWAY, and DONATE.

The same thought process can be used when tackling the “stockroom”.

Keep - Let’s face it, if it is in there, chances are it hasn’t sold in 6, maybe 12 months?  If it hasn’t sold within the terms of your turn goal, it should not be in this category.

Throw Away – This is a hard category to put parts inventory in when you have a value assigned to these parts on your Financial Statements, but it may be for your own good in the long run.  Talk to your CPA, because there may be some tax savings in getting the obsolete inventory out of your asset list.

Donate - As long as the parts are in this stockroom they are not being put to any use.  Fire sell them off, and if you can’t maybe there is a local trade school that could put them to use.

Before completing another inventory count in your business, take a long hard look at the asset value on your balance sheet.  Figure out a strategy to maintain the value at the level where you get the best return on your investment.