Inventory aging is the process of categorizing and evaluating stocks based on how long they have been held in inventory. This refers to the time it has been in storage since it was received into inventory, which is the "age" of that inventory. Examples include: 0-30 days, 31-60 days, 60-90 days, and so on.
The goal of inventory analysis is not to check product expiration dates, but rather to identify issues such as slow-moving items, overstocked products, and determine the overall health of inventory assets. This will help teams take timely action to clear old stock to reduce holding costs and inventory risks.
Inventory aging analysis is often confused with expiration dates or shelf-life management, but the two serve different purposes. Expiration date management focuses on inventory quality, but inventory aging focuses on financial health. Even items that do not have strict expiration dates, such as hardware screws or clothing, still benefit from inventory again analysis.
From an accounting perspective, inventory is considered as an asset. However, it is a low-liquidity asset. That means if an inventory cannot be sold, it can lead to excess stock, tie up storage space, and reduce cash flow. This can limit a company's ability to cover operating expenses or invest in newer, higher-demand products, negatively impacting overall business operations.
The most common approach to inventory aging analysis is grouping items based on the time elapsed since they were received. These time segments are often in 30-day intervals. Inventory held for 0-30 days is generally considered healthy, newly received stock. Items aged 31-60 days are usually within a normal sales cycle. However, inventory held for more than 61 days is often flagged for review, while items aged 90 or 180 days or more may be commonly classified as slow-moving or obsolete inventory.
This type of analysis allows users to quickly assess how much capital is tied up in aging stock. For example, if total inventory is worth $10 million, inventory aging analysis may reveal that $3 million consists of items that are unlikely to be sold, which is may be written off as a loss.
Beyond typing up casual, aging inventory also creates hidden costs for companies. First is warehouse holding cost. As long as items remain in storage, businesses must continue to pay for warehouse space, utilities, and labor for handling and inventory counting. Over time, the cumulative cost of managing aging inventory can exceed the profit the product would have generated.
Another hidden cost is devaluation. For example, a phone case purchased for the latest phone model may lose most of its market value if it remains unsold for 2 years, after consumers have moved on to newer devices. In such cases, the product may only be sold at a steep discount, or not at all, resulting in a financial loss for the company.
Identifying aging inventory allows businesses to plan corrective actions. Common strategies include clearance discounts, bundled promotions, or offering items as free gifts. In some cases, companies may choose to write off or dispose of obsolete inventory for tax purposes.
Although these actions may reduce gross margin, converting inventory back into cash and freeing up warehouse space is often a higher priority for maintaining healthy operations.
