Inventory liquidation: Why, when, and how to do it

You know what they say — everything should be enjoyed in moderation. Well, the same goes for inventory. Sure, it’s a stretch of a comparison, but it’s not that far from the truth, to be honest. Excess inventory might seem like a totally acceptable problem to have, but it’s a problem nonetheless, and come tax season, you’ll wish you’d gotten rid of it sooner.

Nobody wants to end the fiscal year with unsold inventory collecting dust in a warehouse, paying storage costs and taxes on products they aren’t selling. Unfortunately, you can’t predict the future, aka market trends or shifts in consumer behavior, so excess inventory is quite a common problem for businesses. If you’re in a similar situation, you might want to look into inventory liquidation. Luckily, we’re here to give you the rundown.

What is excess inventory?

Excess inventory consists of unsold or obsolete inventory that a company might have at the end of the year. It can be the result of overstocking, inventory management errors, unpredictable shifts in market trends or consumer behavior, or, of course, unprecedented events like global pandemics.

It’s basically extra inventory that’s sitting around gathering dust in a warehouse. In some cases, this inventory can still be sold off or donated, but perishable goods with a shelf life or an expiration date might become obsolete, in which case they’ll need to be discarded.

What is inventory liquidation?

Inventory liquidation is the process of getting rid of excess inventory or obsolete products sitting around in a company’s warehouse. It usually happens when storage space becomes critical, when products in stock are no longer in demand, have reached their expiration date, or have become obsolete.

The main goal of inventory liquidation is to free up storage space, prevent unnecessary spending and losses associated with storing unsold inventory, and recover capital, where possible. You might want to do this before the end of the fiscal year to prevent paying taxes on unsold inventory.

Benefits of inventory liquidation

The benefits of inventory liquidation are manifold, from freeing up capital to freeing up storage space, to building customer loyalty, and more. Below are some of the top benefits of liquidating inventory:

• Reducing holding costs — The first priority of inventory liquidation is to reduce holding costs and make sure you’re not keeping products in stock that aren’t going to sell anytime soon. You don’t want financial resources tied up in insurance and storage costs or hold on to depreciating assets.
• Freeing up storage space — One of the main goals of inventory liquidation is freeing up valuable storage space, so you can stock up on core products that actually sell. You only have a limited amount of space in a warehouse, space that you’re paying rent for, so you want to make the best use of it.
• Improving cash flow — Getting rid of excess inventory enables businesses to turn obsolete or unsold goods into cash, improving cash flow and the overall bottom line. This cash can then be reinvested into different areas of the business.
• Preventing obsolescence — Disposing of excess inventory before products reach their expiration date is crucial if you want to avoid profit loss. At the same time, making sure you only keep a certain amount of items in your stock ensures that you’re not taken by surprise if a product becomes obsolete or unpopular among customers.
• Prioritizing core products — Through inventory liquidation, you can shift focus to your best-selling products and invest in promoting and marketing those products as effectively as possible. Part of that shift is eliminating slow-moving inventory and redirecting resources toward your core products.
• Tax benefits — Holding onto excess or obsolete inventory can expose you to increased taxation. When you liquidate inventory, you’ll often be able to write off the associated losses and get some tax benefits to prevent unsold inventory from hurting your business.

When to liquidate inventory

A common question that businesses ask is — when is it the right time to liquidate inventory? The timing of inventory liquidation will depend on several factors, including your storage capacity, products nearing their expiration date, seasonal factors, changes in market trends, the approaching tax season, and, of course, financial constraints.

Inventory management is crucial in all of the above-mentioned situations. Keeping tabs on your inventory and your supply chain in real time can help you predict certain shifts in consumer behavior and identify slow-moving inventory before it’s too late. Using an inventory management platform such as Katana can help you prevent certain negative situations and take action to liquidate excess inventory before it starts hurting your bottom line.

How to liquidate inventory

Elvis said it right: a little less conversation, a little more action, please. Now that we’ve established how excess inventory works, why you should avoid it, and what are the benefits, it’s time to get down to the business of actually liquidating your inventory. There are several ways to accomplish this, and your choice of action will depend on the particularities of your situation, your business goals, your inventory levels, storage capacity, and a lot more. The important thing is to know that even when it seems like there’s nothing you can do about the obsolete products lying around in your warehouse, you still have options. Let’s go over them now.

1. Inventory assessment

The first step of the inventory liquidation process is assessment. Before you can even begin to think about the best way to get rid of unwanted inventory, you need to get a clear picture of what you’re actually dealing with. Take some time to run a thorough inventory audit to pinpoint obsolete, slow-moving, and unsold products, and determine whether they’re suitable for liquidation. Assess their condition, expiration dates, market demand, and any other factors relevant to your business, to identify which items in your inventory need to be liquidated.

2. Setting clear goals

Your inventory assessment will give you a clear idea about which products you need to focus on and which ones belong ‘in the trash pile,’ so to speak. Before you start getting rid of them, take time to figure out your goals. What’s the purpose of the liquidation strategy? Are you looking to free up space, reduce costs, get tax benefits, or generate some quick cash to pay off debt or reinvest in core products? Once your goals are clear, you’ll be able to come up with ways of reaching them by liquidating excess inventory in your stock.

3. Starting the decluttering process

It’s finally time to get rid of the products in your inventory that no longer bring you joy, to quote Marie Kondo here. But what are you supposed to do with these products? There are a few options to consider:

• Professional liquidators — You can actually hire a specialist to handle the entire inventory liquidation process on your behalf, which will definitely save time and effort on your part, but it will also require a financial investment. If what you’re looking for is to generate quick cash by disposing of excess inventory, this might not be the best way to go about it.
• Discount sales — One way of selling slow-moving inventory faster is to offer discounts that can help you move these products quickly and start focusing on your core products. Sure, it will be a loss, but not a total loss, especially if the products are still viable and well within their shelf life.
• Bulk sales — This is one of the most effective strategies to move excess inventory fast. You can choose to sell products in bulk to wholesalers, distributors, discount retailers, and other partners. It’s the best way to get rid of large amounts of products you don’t need anymore. You can do this through marketplaces like eBay or Amazon or through auction websites.
• Auctions — You can collaborate with auction houses or digital auction platforms to sell your excess inventory to the highest bidder.
• Donations — If generating cash is not really your priority and you’re just looking to free up some storage space or get rid of products that aren’t high in popularity anymore, you can try donating products to different non-profits or other charitable organizations.
• Throwaways — If there are products in your inventory that have already reached their expiration dates, there’s not much you can do about it except dispose of them at a loss. Some products will inevitably end up in a landfill, while others, such as medical devices or pharmaceuticals, will have to be discarded following specific guidelines.

Avoid excess or unsold inventory with Katana

The best way to prevent accumulating excess inventory or ending up with unsold items at the end of the fiscal year is to focus on inventory management to nip these problems in the bud. With Katana, you can keep tabs on your best-sellers, identify slow-moving inventory, and maintain a healthy balance between demand and supply. It also offers an inventory planning and forecasting feature, so you can avoid excess inventory piling up in the first place.

Ready to start optimizing your inventory? Get in touch with our team and get a demo to see Katana in action!

Ioana Neamt

Contributing Writer

With more than 10 years of copywriting experience, Ioana has a fondness for longform writing, investigative journalism, cats, and Victorian-style mansions.