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Business & Tax
Quantify excess stock against a target turnover ratio, then work the four levers that cut it — forecasting, order size, the slow tail, and ABC classification.
By FreeCalculators Editorial · Published 2026-09-01 · Updated 2026-09-04 · 5 min read · 1,144 words
To reduce excess inventory, first quantify it: excess equals current average inventory minus the inventory a target turnover ratio would require, which is annual COGS divided by that target. A business with $600,000 of COGS holding $120,000 of stock against an 8x target should hold $75,000, so $45,000 is excess. Naming the dollar figure changes the conversation from a general sense that there is too much stock to a specific amount of cash to recover, and it tells you when to stop cutting.
Holding costs are commonly planned at 20% to 30% of inventory value a year, covering warehousing, insurance, shrinkage, obsolescence, and the financing cost of the tied-up capital. On $45,000 of excess that is $9,000 to $13,500 a year of pure carry, before counting the opportunity cost of what else the cash could do. Compute the figure once and it becomes the budget you are allowed to spend on fixing the problem.
| Lever | Typical time to cash | Risk it introduces |
|---|---|---|
| Freeze reorders on slow SKUs | 1–2 order cycles | Minimal — these items are not selling |
| Reduce order quantity, raise frequency | 1 quarter | Higher per-order cost; needs supplier agreement |
| Better forecasting on A items | 2–3 quarters | None directly; effort cost only |
| Markdown and bundling | Weeks | Trains customers to wait for discounts |
| Liquidator or donation | Days | Recovery well below cost; possible channel conflict |
Classify SKUs by annual consumption value: A items are roughly the top 20% of SKUs carrying about 80% of value, C items the bottom 80% of SKUs carrying about 20%. Count and forecast A items tightly, review B items periodically, and move C items to vendor-managed or just-in-time replenishment where a supplier will carry them. Applying the same control effort to every SKU is how businesses end up counting screws as carefully as engines.
Worked example: recovering $45,000 of excess (2026)
Annual COGS = $600,000 Current average inventory = $120,000 Current turnover = 600,000 / 120,000 = 5.0x (73 days) Target turnover = 8.0x (46 days) Target inventory = 600,000 / 8.0 = $75,000 Excess = $45,000 Holding cost avoided at 25% = $11,250 / yr Slow tail (above 146 days on hand) = $28,000 at cost liquidated at 45% of cost -> cash = $12,600 write-down recognized = $15,400 Remaining $17,000 cut by smaller reorders over 2 quarters
The tax treatment of that write-down is worth getting right. For most taxpayers the IRS limits a deduction for donated inventory to its cost basis rather than its retail value, so donating dead stock and selling it to a liquidator often land in a similar place economically — the donation route trades cash recovery for a deduction. Whichever you pick, the write-down only becomes deductible when the goods are actually disposed of or the value is genuinely realized, not when you decide the stock is bad.
Comprehensive Guide
Read our business and tax guide for margins, payroll, and tax planning.
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How this guide was created
This guide was written and reviewed by FreeCalculators Editorial, drawing on published formulas, official government sources, and real calculator outputs from our 4 calculators in this category. Every claim is sourced; every formula is auditable. Read our review policy.