As a seasonal business owner, your inventory is inconsistent year-round. At the beginning of and throughout your busy season, you need a lot of inventory to run your business. But when your slow season starts, you need to get rid of inventory. It takes careful planning to avoid excess inventory in your seasonal business.
Planning to avoid excess inventory
Operating your seasonal business takes strategic planning. You should know how you will manage your inventory in advance.
You need information about your inventory to make a plan. Gather data from these sources before outlining your plan:
- A forecast of your sales and expenses
- The lead-time of your vendors
Review past inventory data in your accounting books. Make note of items in your inventory with the highest sales. Knowing your top-selling inventory helps you place orders and avoid running out of items.
Also, look at inventory with the lowest sales. You may be able to cut back on less popular items. Spending less on items that do not bring in significant revenue will save you costs.
Track the turnaround rate of your inventory. In other words, how long does inventory sit in your business? The longer your inventory stays on your shelves, the harder it becomes to sell.
If you have excess inventory at the end of your season, you should mark down items. When you change the price of a product to a lower amount, you still have to cover everyday expenses.
Let’s say you own a fireworks store. At the end of New Year celebrations or the Fourth of July, your sales slow. But, you still have to pay overhead costs, such as rent and utilities. You could mark down fireworks at the end of the season. The marked-down items you sell can help cover overhead costs.
Overhead expenses and the cost of payroll programs can add up. That is why you want to move inventory through your business as fast as possible.
Past sales, expenses, and turnaround rates help you forecast sales and expenses. If you don’t change your business, it’s likely that your seasonal business cash flow will be similar to the previous season. Use the projections for next season to determine how much inventory you need.
When to place orders
Line up your inventory orders before the busy season starts. Check on the lead time of your vendors. Lead time is the number of days a vendor takes to deliver goods to you after you place an order. Lead times vary among vendors.
Determine how much of each inventory item you need to order and when you need to place orders. Decide how much inventory will cost you. Write the expenses into your business budget.
Deducting inventory expenses
Expenses of a business include inventory costs. You can deduct some inventory expenses on your business tax return. You deduct inventory expenses as costs of goods sold. Costs of goods sold are expenses directly involved in producing products or providing services.
You can also deduct expenses if you use part of your home as permanent storage for inventory. You deduct a percentage of your monthly rent or mortgage payment. The percentage represents the square feet of your home that you use for storing inventory. Make sure you check the rules for the home office deduction before you claim it on your tax return.
Keep detailed records of inventory expenses. You must prove you sold the items during the tax year filed to deduct business expenses.
In addition to deductions for allowable business expenses, detailed records can help you make an excess inventory calculation. Excess inventory calculations help you when you have too much product on hand and need to make a change.
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This article is updated from its original publication date of May 26, 2016.This is not intended as legal advice; for more information, please click here.