If you were to rank the most common inventory mistakes, failure to forecast demand -- which results in excess inventory -- would certainly be near the top of the list. For many companies, the move to ecommerce (which often requires keeping stock in-house to avoid back orders) could be the driver. Whatever the cause, at least one industry report called high inventories “the new normal.”
Part of the solution, of course, is to improve forecasting, so you don’t end up with large quantities of products sitting in your warehouse. But, what if you already have slow-moving items taking up valuable warehouse space?
As The Distributor Board, a consultancy group, noted in Industrial Supply Magazine, “Excess and obsolete inventory is costing the typical distributor 25 percent a year.” That’s 25 percent of its value! You might think that you’re just losing warehouse space, but you’re losing revenues, too.
The smart way to manage excess inventory
One solution is to donate your obsolete inventory to charity. Donating inventory provides two significant benefits: It instantly frees up warehouse space and it can provide your company with a tax deduction. Yet, most companies rarely think of donating their excess merchandise -- which is surprising, considering the pitfalls associated with the more common options.
Take liquidating, for example. Selling items for a fraction of their cost may move inventory out of your warehouse, but those items could end up on the secondary market, competing with your new stock and diminishing your brand. The same holds true for giving your excess inventory to your employees. You lose control of it.
And in these environmentally-conscious times, dumping new, unsold products into a landfill not only hurts your brand but can tarnish your corporate image with potential customers. It’s a waste in every respect.
The advantages of making “gifts-in-kind” donations.
Donating your unwanted merchandise, on the other hand, can allow a company to accomplish good works while reaping tax benefits. Under IRC Section 170 (e)(3), C Corps that donate their unused inventory to qualifying nonprofits can receive deductions equal to the cost of the inventory donated, plus half the difference between the cost and fair market selling price (not to exceed twice the cost).
Translation: An item that costs $10 to make and retails for $30 could earn your company a tax deduction of up to $20.
With all that going for it, it’s hard to say why making gifts-in-kind donations isn’t a more popular strategy. Perhaps business owners assume it’s a cumbersome process. The reality is, it isn’t difficult at all to make it a regular part of your business work process.
How to create a gifts-in-kind donation program.
You can create a merchandise donation program in as few five steps:
Step 1: If you don’t already have a team in place to handle charitable donations, create one. This will help streamline the process.
Step 2: Decide which nonprofits are a good fit for you. If you manufacture infant clothing, for example, perhaps you want to look for organizations that serve this young population and their families. Or, reach out to your employees and find out what causes are close to their hearts. In addition, determine if it makes sense for you to donate on a local or national basis, or both.
Step 3: Decide how often you will make donations. Do you want to make donations once a year, once a quarter or once a month? Figure out a plan that works best for your business and your warehouse.
Step 4: Get the word out. Make it easy for charitable organizations to do business with you. On your website, indicate what types of products you typically donate and what types of nonprofits you support, including their geographic location. Specify how you want groups to contact you and when their requests are welcome.
Step 5: Get help if you need it. There are groups called gifts-in-kind organizations that can handle the whole process for you. They will take your donated items -- from several truck loads to a single van load -- and make them available to schools and nonprofits.
Once a gifts-in-kind organization accepts your donation, it will request that you ship it to them but charge you no service fees. It’s that simple. And once the items are donated, you’ll be told exactly what charities received your goods and you’ll receive proper tax documentation.
Donating your excess inventory won’t solve all your inventory problems. But, it will help your business cut its losses, while benefiting the community at the same time. That’s a win/win.