During these difficult economic times, business owners are looking for creative ways to raise money. However, many businesses that have inventory refuse to liquidate the inventory at a loss, or even at a big discount. Somehow the owner feels that the inventory will eventually be sold for a price that will yield a good margin. In short he/she has fallen in love with the product.

This is a big mistake, as obsolete and outdated inventory will continue to depreciate in value, and will eventually be liquidated or discarded.  Aside from the obvious costs associated with carrying the inventory: Interest, storage, overhead, etc.... There is an even larger lost opportunity cost.

For example, if a business manufactures and wholesales tables, and has $100,000 of tables at cost that are odd quantities and/or damaged. Historically, the $100,000 would have sold for $200,000. However, in the current state no one in the sales force want to even attempt to sell them, and the warehouse people probably could not readily ship them. So the anticipated revenue from these tables in the normal course of business is $0.

There are a variety of ways companies can liquidate this inventory: warehouse sale, customer discounts, consigning to customers, liquidator, auction, etc.... Each has different benefits and costs. For example, a warehouse sale might yield the highest gross return, but would require a significant amout of effort from the company. Conversely, the liquidator would be able to immediately remove the product, but at a big discount. The options need to be evaluated to determine the needs of the business.

However, the business owner needs to move this inventory and convert it to cash as quickly as possible (even at a loss). If for example this inventory netted $50,000 ($50,000 loss), the company could utilize this to manufacture new product with that working captial for product it knows will move to its existing customer base. If the inventory turns are 90 days. Then this simple transaction could yield $400,000 more revenue in a year's time ($50,000 x 2 times markup x 4 turns in the year).

The leverage of doing this can be pretty significant. Generating $200,000 more gross profit in the year ($150,000 after the $50,000 loss), cleaning up old inventory in the warehouse, having a larger selection of new products to sell to name a few.

Of course, each situation is different, however, I believe there will also be a reluctance on the business owner to sell at loss. I know of business owners who have tapped their retirement plans for liquidity, but refused to sell their old inventory at a loss. Sounds silly but it is true.