It’s a common lament from installation companies across the systems integration industry: what do I do with excess inventory? Not only does unused equipment waste warehouse space, but it’s actually a detriment to the balance sheet of any commercial integration business.
Inventory challenges can negatively affect the bottom line, and while companies can attempt to return equipment, many times that involves a restocking fee or distributors simply won’t accept it past a certain date. In the ever-changing systems technology market, equipment can become obsolete quickly with new models introduced, further hampering the potential return to distributors and manufacturers. Then there’s the issue of the warranty on the product once it’s out of the box.
It’s important to find a solution to this problem, because any dollars retrieved from unused inventory can be reallocated into other parts of the business, such as in marketing, sales or capital improvements. Let’s take a look deeper into the excess inventory issue and specifically at a new program aimed to assist your integration business in this cause.
New Clearinghouse for Warehouse Clutter
Portland, Maine-based Stockroomexchange.com was launched in May 2017 by founder and chief exchange officer Tara Simopoulos to help solve these problems. With a nominal fee, integrators can resell excess parts, equipment and devices, recouping part of their capital investment, clearing line items on their books and allowing their companies to become more profitable. The site is built as an industry community, connecting systems integration professionals together.
Simopoulos says she realized the extent of the problem while involved in a systems integration company. Not only was the equipment taking up space in the warehouse and stockroom, but she was being told that it was hurting the finances of the installation company.
“I heard of this problem from other integration companies as well,” she notes. “They had extra parts and equipment they were unable to return and some were simply throwing it out. They purchased parts and other equipment and were unable to use it for the job for whatever reason, or the specifications for the project changed mid-stream. Since everyone faced this common dilemma, it seemed the industry as a whole would benefit from a solution like this.”
“[Your excess inventory is]taking up valuable space and collecting dust. It’s like a $1,000 bill sitting on a stockroom shelf that could be used for other purposes.” —Mark Boutin, Chenmark Capital Management
Promoting green contracting practices in the way of re-purposing previously purchased parts was another contributor behind the creation of Stockroomexchange.com, she said.
The service gives an integration business member unlimited access to all features of Stockroomexchange.com, including posting items to sell, purchasing from other members, search functions and user messaging.
Users can get rid of overstocked parts, look for discounted products and find legacy equipment that may be difficult to procure from other online channels that don’t focus on systems integration, such as eBay or Craig’s List.
“It’s a great way to find buyers for products you no longer need, improve inventory, reduce stock, make more room in your warehouse and allocate funds for other purchases,” Simopoulos says.
Why Excess Inventory Skews the Balance Sheet
Proper management of inventory levels is a critical factor to improving the profitability of any integration business. According to Simopoulos, the carrying cost of excess inventory includes many facets that affect the integration business. Carry cost is a percentage of the inventory value and includes taxes, employee overhead, depreciation, insurance, storage and the overall cost of capital to the installation company. The cost of inventory covers all costs associated with holding or storing inventory for sale. These costs include the opportunity cost of the money used to purchase the inventory, the space where inventory is stored, transportation or handling and the cost of deterioration and obsolescence.
Mark Boutin, CPA and director of finance for Chenmark Capital Management, also based in Portland, spent many years handling the books for a large systems integration company and 13 years specializing in accounting and finance for small businesses. Boutin says there are financial implications to keeping old or unused inventory on an installation company balance sheet, as well as the fact that it’s bad business practice overall.
“On the financial side, when you buy inventory you are using cash, and as we all know, ‘cash is king,’” he explains. “Once you issue a purchase order to buy inventory you are committing to send cash out the door. If you end up not using it or needing it and then miss the return window of 30, 60 or 90 days, many distributors or manufacturers won’t take it back. Now you’ve paid for the product as well as the shipping and it’s sitting in your warehouse taking up valuable space and collecting dust. It’s like a $1,000 bill sitting on a stockroom shelf that could be used for other purposes.”
In addition, when companies purchase inventory, it enters the balance sheet as an asset. If banks, customers or vendors look at your balance sheet—a snapshot of your financial position at a given period of time—excess inventory causes an improper valuation of business assets, Boutin says.
“You can perform a physical count of all the inventory but that takes time and takes people off the job. If an inventory adjustment is made as a result of the inventory count, that hits the P&L as an expense but at the end of the day there’s no resulting revenue,” he says. “You need to remember that you purchase inventory to generate revenue. When you have to write it off it turns into non-revenue generating. You lose the cash and the usefulness of the equipment.”
Being able to effectively sell overstock equipment, according to Boutin, can enable integrators with a scenario such as: when you write off $1,000 on the P&L for equipment and sell it for $750, you only have to expense $250 on your income statement. “It’s all about being proactive,” he says.“Being able to sell excess stock is an avenue to help those blips on the radar that happen. It’s a great way to recoup cash and decrease your exposure from an expense standpoint when you have to write off excess inventory.”
Of course, it is necessary to have inventory on hand for most systems integration companies, and that’s where project management comes into play.
“So depending on if you have a service side, you need minimal inventory to support ordinary installation company operations. From a project perspective, the best method is‘just in time’inventory,” Boutin suggests. “When every project is customized, you order for that job, nothing more and nothing less. Let’s say a project start is months away. You don’t buy the equipment now because cash is king, but you have to be tuned into the job so you get the equipment just in time.”
Inventory Challenge Can Aid Organization, Industry Cause
Based on the number of calls his organization fields from members on what to do with excess inventory, it’s a critical topic, says Chuck Wilson, executive director of the National Systems Contractors Association (NSCA). “This has been an ongoing discussion at NSCA and many members have voiced concerns over what they should do to clear the shelves of unwanted equipment,” he says.
Stockroomexchange.com was selected to participate in NSCA’s Business Accelerators for Members Program, which gives NSCA members access to vetted professional services, discounts and other offerings designed to accelerate integration business growth, Wilson notes.
He also notes that Stockroomexchange.com is donating 5 percent of its profits to NSCA’s/SIA’s Partner Alliance for Safer Schools (PASS) K-12 safety and security initiative. The organization is funded through the NSCA Education Foundation and donations allow NSCA staff to attend industry conferences and meetings, such as the recent SIA Government Summit, to spread the word about the importance of its mission.