How much cash is aging in your warehouse?

The short answer

Cash drag = value of inventory on hand beyond the demand you can serve before it expires. For a perishable SKU: at-risk value = units on hand x unit cost, for every unit above (average daily demand x remaining shelf life in days). Anything above that line will not sell before its date and becomes a write-off rather than a sale.

Worked example

A SKU costs 6.20 a unit, sells 15 units a day, and has 40 days of shelf life left on the current lot. You can realistically sell 15 x 40 = 600 units before the date. You hold 900. The 300-unit excess is 300 x 6.20 = 1,860 of at-risk value, and it is cash that has already left your account.

Why shelf life changes the whole calculation

In a non-perishable category, overstock is a timing problem. The cash is tied up longer than you would like, but the units eventually sell and the money comes back. In food and beverage, overstock past the shelf-life horizon is not a timing problem, it is a loss that has already happened and has not yet been recognised.

That is why days of cover is the wrong measure on its own for perishables. Ninety days of cover on a product with 40 days of remaining shelf life is not a well-stocked SKU, it is a write-off waiting to be counted.

Lot-level, not SKU-level

Shelf life belongs to the lot, not to the SKU. Two lots of the same product received six weeks apart carry different remaining dates and different risk, and a SKU-level average hides that. If your oldest lot is about to date out, the SKU-level figure will look comfortable right up until you write the lot off.

Running this calculation per lot, oldest first, tells you which specific lot to move now and how hard to discount it. It also tells you when the honest answer is that a markdown recovers more cash than holding for full price.

Frequently asked questions

What is inventory cash drag?

Cash drag is the working capital tied up in inventory that will not convert to a sale in time to be useful. For perishable goods it is the value of stock held beyond what can be sold before the expiry date, which becomes a write-off rather than revenue.

How is this different from ordinary overstock?

Ordinary overstock delays cash; perishable overstock destroys it. Non-perishable excess eventually sells, so the cost is the carrying cost over the extra time. Excess past the shelf-life horizon never sells at all, so the whole unit cost is lost.

Should I calculate this per SKU or per lot?

Per lot. Remaining shelf life is a property of the lot, and averaging across lots hides the oldest one, which is the one about to cost you money. Work oldest lot first.