Tax

Nine Inventory Management Mistakes — and One Easy Solution

How to avoid competing with yourself by donating excess inventory or dumping it for pennies on the dollar.
Gary C. SmithAugust 19, 2013

Managing excess inventory is a challenge for even the most efficient organizations. Overage issues can be a constant headache for CFOs, draining profitability and taking leadership focus away from core business priorities. When faced with excess inventory, many companies try the following common—though misguided—strategies. 

1. Do nothing
It’s easy to put off decisions about what to do with your slow-moving inventory. But time, and the inevitable accumulation of inventory, will take its toll. And at year end, your company will be paying increased taxes. 

2. Lease additional space
Your overage may be out of sight, but by leasing additional warehouse space, all you’re doing is contributing to the profitability of storage and logistics warehouse companies. 

3. Liquidate it
Companies that choose to sell excess inventory at a dime or pennies on the dollar should be forewarned—the product may wind up in secondary markets competing against your company’s efforts to sell current stock. Your company may even get calls from unhappy customers because your inventory cut into their sales and profit margins. Liquidation can lead to strained customer relationships. 

4. Continue selling it
If you do the same thing over and over again, expect the same result. If sales have tapered off on certain products, why would they pick up again at a later date? Don’t hang on to outdated and stale merchandise. Why not move on to newer, more attractive and likely more profitable product lines?

5. Give it away locally
Giving away small amounts of product locally might help your company’s community outreach efforts. But it also might reduce sales and get people used to the idea that they can expect the same in the future. Suggesting that company leaders and staff get involved on a local board, volunteer for a special event or help local charities raise funds might be more effective. 

6. Sell it to your employees
Although employee discounts are not uncommon and can be a nice perk, this Band-Aid approach will only mildly—and temporarily—reduce inventory levels.

 7. Give it away to your employees
If you allow your employees to take moderate amounts of product home with them, expect your product to start showing up on eBay.

8. Sell it to your top accounts
Similar to local giveaways, frequently discounting product for your existing buyers will motivate them to wait for your next price reduction instead of purchasing your products at full price.

 9. Send it to a landfill
Assuming the product is ultimately destroyed and doesn’t wind up on a secondary market, trashing your merchandise is simply a wasteful strategy.

Luckily, there’s an easy alternative to these misguided approaches, and it’s a solution that allows financial professionals to turn a problem like excess inventory into a positive—for the company’s reputation and bottom line.

IRC Section 170(e)(3), a little-known section of the tax code, allows Regular C Corporations to donate excess inventory and receive an up to twice-cost federal tax deduction. Donating your excess inventory to a gifts-in-kind organization not only will significantly reduce your tax obligation, it will get your excess, non-selling products into the hands of qualified, deserving nonprofits across the country.

Gifts-in-kind organizations solicit donations of valuable, new merchandise from American corporations and redistribute that merchandise to their members, which include schools, churches, government agencies and other nonprofit organizations in need of supplies. The donation process is easy, secure and flexible, and many gifts-in-kind organizations provide a range of free services to donors. They can accept shipments of supplies ranging from one box to dozens of truckloads, and in many cases, the freight charges to ship a donation to a gifts-in-kind program also are tax deductible. Gifts-in-kind organizations keep detailed records of merchandise donations and redistribution, so when tax time rolls around, companies know exactly who received their products and how much they received.

In addition, provisions in the tax code stipulate that donated product cannot be resold, bartered or traded and must be used in a manner consistent with the charity’s mission, which means you and other company leaders will rest easier knowing that your product won’t find its way back to the open market. Companies also gain brand protection through their donations. The allocation system for gifts-in-kind donations ensures that the products are distributed widely and thinly across a closed, national nonprofit network, providing protection from the brand and product devaluation that can occur when extra inventory ends up in the open market.

Typical items donated include office supplies, classroom materials, clothing and shoes, maintenance items, tools and hardware, toys and games, computer software, sporting goods, books, tapes, CDs, arts and crafts, personal care items, holiday and party items, janitorial supplies and more. Many companies also take advantage of gifts-in-kind programs to manage items such as underperforming SKUs, discontinued models or colors, seconds, buybacks and returns.

Gary C. Smith is the president of NAEIR, a Galesburg, Ill.-based gifts-in-kind organization.