Furniture Inventory Is Not What It Used To Be

This is an important fact that furniture manufacturers must remind themselves.

In the years past, much of a company's inventory was in materials - Wood, hardware, fabric and finishing materials. All items that, to a good part, could be converted into something else - Such as better selling pieces.

But, today, with a large part of inventory in finished goods (outsourced or imported), there is no opportunity to convert it into something else. Thus, the recognition of inventory value demands much more attention. Management must be objective and decisive about it - Otherwise, they may see their company’s net worth disappear quite quickly.

Unlike other commodities that can be valued on trading exchanges, there is no exchange for furniture. Thus, even an independent auditor really does not have anything they can measure the value against. So, it is up to the management and marketing department of a company to be objective about the real value - Especially in today’s marketplace.

This is a dilemma for both the management and marketing departments. They have to contend with the consequences of their decisions. And, I do not mean to say that in a reproachful sense - As the marketplace today is an evolving and difficult environment. It is now at a point that adjustments have to be made to reflect the market changes that have really occurred quite rapidly, in an industry that (historically) requires an investment of much time and effort for product introduction to be profitable.

Prices are down and supply is up. Those companies that have a good amount of inventory that is slow moving, or not moving at all, have to make some decisive moves to lessen it. The longer that it sits in their warehouses (or containers), the more rapidly it declines in value, and the more rapidly it will eat away at a company’s net worth.

Many in the industry intuitively know this. But, I am stressing the issue to remind them of the consequences of delayed recognition of value and liquidation of this inventory.

Inventory is a large part of a furniture company’s assets, and may sometimes even be multiple times the net worth of that company. If a company’s inventory is about 35% of the total assets, and if about 30% of that inventory is sitting in stock considerably longer than projected, it has to be looked at with a realistic value. And, it is better to take a loss now, than an almost complete write-off later.

Management must continuously do the calculations to see how the real (current) value is affecting their net worth. If a declining value asset is held too long, not only is a company allowing the value to dissipate, but they are also losing the ability to use whatever working capital that can be realized from its sale. Add to this the cost a company may be incurring with financing.

And, as time goes by, the effect of carrying that inventory will have a greater, and rapidly increasing, effect on the company’s net worth - To the point that management may find themselves in a situation in which they may only have a short time before their net worth may not be enough to cover their collateral arrangements with financers, or that they may only have a short time before monthly expenses eat away at their net worth.

I wish I can offer a solution to the industry on this problem. About the only thing I can say is that perhaps it is a problem that will lessen in the future. I do not think that many people foresaw this problem occurring. Even though many in the industry foresaw economic benefits with the industry developing in the lower-wage countries, I do not think that many foresaw the full effect of the production and marketing of those off-shore sources - And, the resulting economic situation for the industry here. Good for some, a disaster for others.

But, it seems that things are changing, and many in the industry are adapting. The off-shore producers, who are also negatively effected by this current situation, are now concentrating on other marketplaces - Such as Europe. And, even though many production facilities have been closing here - There are others here that are opening or expanding. Perhaps not as large as those closing - But, they are filling open niches of opportunity. In other words, they are “getting a handle on the situation“.

Again, this situation with inventory is a difficult one for those companies that find themselves with a significant amount of it. The management of many companies have to contend with financers and investors. But, it is best to get the problem behind them. As I mentioned, this is an industry that takes lengthy planning and investment. The current economic situation with market prices and over-supply is the culmination of the great changes over the past few years in the industry. But, that is a relatively short period of time for this industry. And, that is something that financers and investors must recognize.