Why does a company need to `massage` stock levels ?

[eintyni]

Hi
I work for an electrical retail company selling and distributing all manner of electrical goods retail and wholesale. It is approaching their year end which I guess would be 31/12/2010, now the question I have is why would they purposely want to run their stock levels drop as low as they possibly can before that date ?, when I say low I mean that it`s embarrassingly low to the extent that I have to continually apologise to customers for having run out of certain lines.
My employer says that he wants this to reflect in his balance sheet in such a way that it maximizes profits for the year.
Can anyone explain this to me please ?

 

[matthewspeed]

Stocking requires cash outlays, that or creates payables. Even though that stock will have to be replaced, the arbitrary period end date of 12/31 means that the money that will eventually be spent on stock shows up until it is spent as profit. Here is an example. Let's say that widgets cost $10 but sell for $30. If you sell a widget today your books show a profit of $20 (Cash+30, Inventory-10) If you replace the stock (Inventory+10) you show a profit of only $10. This is short sighted, of course, because the sale of that will produce another real profit but by gaming the timing of purchases he can show a higher short term profit by taking a static picture of a dynamic flow of sales and purchases.

 

[Joel]

Less product in the warehouse is less product that can be viewed as "non-performing" or a potential loss.

Having lots of product on hand isn't efficient for business. Having a tight efficiency looks very good. And in the case of your boss, it must be looked at expecially close during the end of the year.