Slow-Moving Inventory
What is slow-moving inventory?
Slow-moving inventory refers to stock that remains unsold or unused longer than expected, typically for 90 to 180 days or more, depending on the industry. It is commonly identified by a low inventory turnover ratio and a high Days Sales of Inventory (DSI).
Common causes include over-forecasting, bulk-buying and sudden market shifts. Businesses often classify these items using Fast, Slow and Non-Moving (FSN) analysis, Vital, Essential and Desirable (VED) analysis and Always Better Control (ABC) analysis, which group inventory based on movement, operational criticality and monetary value, respectively.
Why is slow-moving inventory important?
Slow-moving stock reduces the availability of working capital, increases carrying costs (including storage, insurance and handling expenses) and raises the risk of write-offs, particularly for perishable or trend-sensitive goods. It can also affect financial reporting, as inventory must be valued at the lower of cost or net realisable value when its market value declines.
Monitoring slow-moving inventory helps improve demand forecasting, purchasing decisions and product assortment, minimising excess inventory. Early identification also enables liquidation through bundling, strategic discounts or Return-to-Vendor (RTV) agreements before stock becomes dead inventory.
How does slow-moving inventory work?
Slow-moving inventory is identified and managed through a systematic process:
1. Setting a movement benchmark
A business first defines what slow means for each category of stock, usually expressed as a maximum number of days or months since the last sale. This benchmark is usually set separately for fast-moving categories since a uniform cutoff could misclassify both.
2. Running stock ageing analysis
Inventory is then reviewed through a stock ageing report, which buckets items by how long they have been held, commonly in ranges such as 0-30, 31-60, 61-90 and beyond 90 days. Items falling into the older buckets, relative to the benchmark, are flagged for review.
3. Comparing against sales velocity
Flagged items are then compared with their historical sales performance, often using the inventory turnover ratio, to determine whether the slowdown is a long-term trend or simply a temporary dip caused by seasonality or a short reporting period.
4. Investigating the underlying cause
The business examines why the item is not moving. Common reasons include overordering against an optimistic forecast, changing customer preferences, uncompetitive pricing or a product nearing the end of its lifecycle.
5. Deciding on a corrective action
Depending on the cause, the business may discount, bundle, return, reallocate or write off the inventory. Where inventory is returned to suppliers, the transaction may involve GST credit or debit notes under Section 34 of the CGST Act, 2017 and, where applicable, an e-Way bill, depending on the movement and value of the goods.
6. Recording the impact in the books
The inventory is written down to its Net Realisable Value (NRV) in accordance with Accounting Standard (AS) 2 or Indian Accounting Standard (Ind AS) 2, issued by the Institute of Chartered Accountants of India (ICAI). Where inventory is fully written off, destroyed or otherwise covered under Section 17(5)(h) of the CGST Act, 2017, businesses may also be required to reverse the related input tax credit (ITC).
Example
A consumer electronics retailer classifies wired earphones with no sales for 90 days as slow-moving after consumer demand shifts to wireless models.
|
Metric |
Value |
|
Units purchased |
1,000 |
|
Units sold in last 90 days |
60 |
|
Units remaining in stock |
940 |
|
Cost per unit |
₹450 |
|
Original stock value |
₹4,23,000 |
|
Current market price per unit |
₹300 |
|
Net realisable value of remaining stock |
₹2,82,000 |
|
Write-down required |
₹1,41,000 |
The remaining 940 units are classified as slow-moving. Since the market price is below cost, the inventory is written down to its net realisable value, resulting in a ₹1,41,000 write-down before being cleared through bundled promotions.
Key points to remember
- Slow-moving inventory remains in stock beyond the expected holding period but has not stopped selling.
- It ties up working capital, increases carrying costs and may require a write-down to net realisable value.
- Stock ageing analysis and inventory turnover tracking are the common tools used to detect it.
- Left unaddressed, slow-moving stock can eventually become dead stock with little or no recovery value.
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Try TallyPrime free →FAQs
Yes. Operationally, slow-moving inventory shifts back to fast-moving if sales recover. Financially, both Accounting Standard 2 and Indian Accounting Standard 2 permit reversal of a previous inventory write-down if the net-realizable value subsequently increases, provided the carrying amount does not exceed the original cost.
No. However, recognised write-downs reduce the inventory value reported on the balance sheet. Although Schedule III of the Companies Act does not require inventory ageing disclosures, it requires inventory to be appropriately classified and valued, while many companies voluntarily include inventory breakdowns in the Notes to Accounts.
Days sales of inventory measures how many days stock sits before selling, while the inventory turnover ratio measures how many times stock is sold and replaced in a period.
Monthly or quarterly reviews are standard for many Indian manufacturers. Businesses in high-turnover sectors such as fast-moving consumer goods (FMCG), fashion and consumer electronics often review slow-moving inventory every week so they can respond quickly to changes in demand, product lifecycles and expiry risks.
Seasonal products may appear slow-moving during the off-season. Businesses should review past sales trends before discounting or writing them down.
