Inventory happens.  Inventory for a large volume builder sometimes happens for different reasons than for custom builders or Remodelers.  Some inventory is just plain unwanted.

Some common ways to acquire inventory are:

• Client change orders. You charged a change order fee (hopefully) as well as the cost of the product (hopefully) but somehow didn’t manage, or couldn’t, return it
• You ordered too much, or the wrong thing and couldn’t return it
• You thought you could pick up extra stock on something on “the cheap” hoping of course, to sell/use it later
• You were forced to order some unit of measure, but have more than you need

What does that cost?

• Using your space.  There is an actual cost associated with that.
• Keeping it on, or off, the books ties up your money, actually costs something on the labor burden. Of course if you are leaning to the left of correct, it is potentially fraudulent and significantly serious.
• It messes up your books, ratios
• Potentially a hazard
• Potentially costing money to dispose, disburse, transport, use or incorporate it
• Losing control of items- the “evaporation” factor.  You may have though buy low sell high, but you may not have realized you have to manage it as an asset.  When employees know it is off the books, and not bar-coded, “extra” and otherwise not tracked, the evaporation factor goes much higher. 

Ways to Avoid it:

• Manage change orders, bidding and contracting and purchasing more effectively
• Use a purchase order system, and for goodness sakes, no verbal purchase orders
• Use a system, or some financial modeling, budgeting, or estimating tool that you are comfortable with to get sharper take offs
• Use a qualified number system so every constituent not only knows the type of product, but whether it is standard or an upgrade, etc.  For example, all cabinets start with CAB.123.xyz, etc.  Flooring, FLO.123.xyz, Appliances APP..etc.
• Develop the maturity to understand there will always be “deals” out there, just as there are restaurants.  In both cases, you don’t need to get to every one of them. I have certainly tried on the restaurants!

Some strong choices:

• Donate it to Habitat for Humanity, or any of the hundreds of charities, or possibly your religious affiliated organization
• Donate it to your local builders association if they have a industry parking lot sale.  It is a great way to get noticed and appreciation with the Executive Officer
• Sell it (church, yard sale, flea market, eBay, Consignment)

On a related note, volume builders who are sitting on model furniture are losing a cash or tax benefit opportunity.  If the furniture in storage is going to be used again, the storage fees and handling expense may be worth it. In hard times, they don’t need tax deductions as much as they need assets.  In better times, it can be treated like any other inventory, and donated, sold or disposed of in some beneficial way.

Erik Cofield, CGA has leveraged technology and provided business management consulting for all sizes and types of builders, developers and Remodelers since 2000, including volume, multi-family and custom, to help them improve their business. He is the National Accounts Manager with BuildTopia (www.buildtopia.com), a widely used international construction management software company.  He can be reached via ecofield@buildtopia.com.