Many distributors and manufacturers dove of the cliff with the commodity price run up and plunge of 2008. In addition some saw the value of their inventory balloon as well as the number of units stocked were increased. To compound the issue, some didn’t adjust their purchasing systems, and practices, and bought based upon historical (what their system said to buy) rather than the current environment. This left many with too much of the “wrong” inventory.
For years distributors have utilized LIFO accounting, which benefits them when the value of their inventory is less than the replacement cost (not today’s market!). This results in a LIFO tax deferral. Some view this as an interest free loan / tax deferral from the IRS.
Times are changing. For some it is at light speed.
- For some companies tax time is in March. Just a word of warning, you should check with you accountant. You might be surprised by a much larger tax bill than you expected.
- Check your cash flow. As you come out of selling for higher prices and there is a sudden drop in replacement cost. Your company may be dealing with less collectable dollars. The lag time between selling and collecting at a higher unit dollar rate can create a cash flow problem…..unless you’ve got cash or dated terms or…….
- In the immortal words of a Michigan Electrical distributor, “My inventory is only worth what I can sell it for”. He is so right! The question becomes when do you write down the value of your inventory? Value deflation may, and probably will for a period of time, continue. Have you taken the ‘value hit’ from earlier times?
Some distributors that understand the effect of deflation on their inventory, are shipping product back, taking write downs and working with their manufacturer partners (using SPA’s, rebates and other vehicles) to try and adjust to their replacement stock being 30-40% below current value (this changes by product category and business mix).
Another trend we are seeing is the byproduct of name brand manufacturers outsourcing their manufacturing (or sourcing products to complete their product lines). Now appearing in the market are a surge of un-named, generic products. This excess, uncommitted inventory, is straining supply chains and creating opportunities for some who have available cash Some quick observations for much of this un-electrified product reveals that it is the same quality as what you have on your shelf. This is not an endorsement, but rather a reality check. Some lower-tier aggregator “manufacturers” can capitalize on this as can distributors who can creatively negotiate with manufacturers (name brand and off-shore). Expect to see more of this in the future.
We encourage you to check with your accountant regarding you LIFO issues, because for many this is an immediate problem and may require cash.
The take away from all this LIFO issue is that many will see an unplanned higher tax bill, cash flow issues and may be up side down in their inventory.
On the bright side, you may have noticed that your customer buying patterns have changed. It is the right time to restart looking at:
- Your specific market issues. Things like where are the paying customers?
- Clean up, adjust and tweak your inventory and get right on your SPA’s.
For those that planned for the current events, this is your time to make hay while the market is in confusion. There is money to be made!
7 Comments
Never have truer words been written.
Well we have to keep going if we are going to compete.
So’ll we write down the inventory value.
Down in Georgia
Great post, guys.
Don’t forget that President Obama wants to collect $61B in extra taxes by repealing LIFO. Yes, you read that correctly – repealing LIFO. See page 122 of the White House’s 2010 Budget.
Regards,
Adam
If you didn’t write it down this year… you can adjust your return for this year… but you may have to wait a year… ask your accountant. For now… if you didn’t do it already… you’re paying a higher tax bill.
Not to mention that many will have severe cash flow problems from selling and chasing collections at a higher prices only to turn around and sell the same product at a lower price.
CASH will be KING. Many can expect a long term reduction in business value.
Hold onto your hat and everything else. If they don’t make a coordinated move with the world (yes world) banking system soon to pump up bank capital simultaneously… we’re all screwed. Nobody wants to do it on their own because the value of a country’s currency relative to others will wane if you pump up your money supply with massive recapitalization. If the whole world financial system does it simultaneously, you take away the relativity factor and risk of decline of one currency. However, the risk still remains as long as the world uses different currencies. So… you know what’s coming eventually. Yep… I do realize the significance of that possible outcome.
I just took a 18% hit to my inventory value at year end. And frankly I don’t think it is over with. Deflation is upon us.
If I convert to average costing I’ll have a Tax bill that I won’t reveal here….but it is more than I had planned for.
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