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What Cause Negative Inventory - How Can It Affect The Business?

Updated: Aug 2, 2020

Although the concept of having negative inventory appears to be ridiculous, it can exist and happen to any business. Yes, you are true when considering how we can sell something that we do not have close by. Surprisingly, negative inventory is a very common occurrence because many people consider running negative inventory as a part of the normal process. In fact, negative inventory should be a flag that there is a larger problem inside the process. So, if you record negative stock, will it affect your business?

There are many reasons made your inventory dropped below zero because there are many reasons of negative stock.


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So, what causes a negative inventory?

Timing issues

Timing is the most usual explanation behind negative inventory balance. For instance, Furniture Today, furniture shop, gets an order of 10 desks. At the point when an order is made, the inventory system will record the inventory as already delivered, even though the process did not start or there are not enough desks in the warehouse. This problem will be solved in the short term when the warehouse has enough stock and starts delivering to customers. Then, the inventory balance comes to zero.

Recording issues

Imagine that Furniture Today shop has 2 warehouses called A and B. In warehouse A, there is a sum of 100 lamps while there are 10 lamps in B. They got an order of 25 lamps. The warehouse should be chosen is A. However, when you look at the inventory recording, the inventory balance in A is still 100 whereas it is -15 in B. What happened? It is the consequence of inappropriate recording. Rather than recording 25 lamps in A, they did it in B which has less than the level of inventory meant to transfer from the correct warehouse. Another situation is where the transaction is recording wrong. For example, they recorded a sale of 250 lamps rather than 25 lamps in A. Presently, the inventory balance in A is negative 150.

How can those situations affect the business?

The following order is not correct if the inventory balance is not adjusted. This situation needs to be explained properly. If the issue occurs due to the timing reason, the business should not try to adjust the number. The reason is that the timing issue is temporary, and the inventory balance will be as normal when the timing is a pass. However, if there are errors in recording such as eliminating from warehouse B instead of A, the next ordered amount will be incorrect.

The next promise to the customer of having stock even it is not will make customers dissatisfied. No one wants to wait. They want their order delivered as soon as possible. Not having enough stocks is never a good explanation for your customers.

The purchasing department does not know that we need to buy more items. And when they are told to buy more stocks, it is processed as a rush buy which affects the plans, eliminates profits, and increases ordering costs.

Wanted inventory could exist in the warehouse. Let us take Furniture today as an example again. They set up a system that orders inventories whenever having orders from customers. According to the inventory record, they now have no desk in warehouse A due to the sale of 100 lamps last month. However, the true sale was 50 lamps. The real quantity in warehouse A is 50. What's more, the issue happens when they got an order of 10 lamps from the customer. Immediately, the system orders more than 10 lamps from the vendors. Now, they have 50 unwanted inventories in warehouse A. It will be disastrous if inventories are expensive, difficult to store, or infrequently sold.

In the long term, the negative balance could cause mistaken available quantities, unfulfilled orders, increase expenditures due to unnecessary overstocking, delays on sales, and services because of the lack of inventory. If left uncorrected, the negative inventories could disrupt the entire process. Depending on incorrect data from negative inventories can result in purchasing unwanted inventory and obstructs the valuable warehouse space.

If you need advice or services on any aspect of bookkeeping, accounting and tax, our specialists are ready to help. Get in touch with us for free quote.

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