Industrial Materials & Inventory Asset Valuation
By The Numbers
How much will buyers pay for inventory in liquidation?
How are raw materials valued in liquidation?
When should a work-in-process conversion of inventory be considered?
Many manufacturers have a significant level of inventory in an in-process state in varying levels of completion. The key factors to remember from a liquidation valuation perspective in relation to work-in-process remain consistent with other forms of inventory: who are the likely buyers, what and how much will the buy, and at what rate. With work-in-process, the answer to the first part of that question is often: “no-one in its current state.” When this condition exists often in order to consider the value of work-in-process collateral a conversion of that work-in-process may needs to be considered. In these cases there are particular characteristics that should be considered in order to rationalize the valuation that inventory on a converted or completed basis. The following condition must exist in order to consider a work-in-process conversion:
- When an existing customer has ordered the product, actively wants it and will pay in advance for it.
- When there is a significant quantity of WIP on hand that is almost finished or where the cost/benefit ratio of finishing it is favorable.
- When the work-in-process is in a near-finished form, only needing simple packaging or light manufacturing (kitting or other non-intense and low expertise form of work) to complete. (Remember that there is risk in anything so the projections need to be very favorable for a buildout. If the buildout is only marginally more favorable that the as-is recovery, it should not be considered.)
- When there are no (or very few) additional supplies or materials required to finish the product. (Remember it may be difficult to get additional supplies from the existing customer base)
- When the cost of additional items may be higher than normal due to the quantities required.
- When the lead-time to acquire additional supplies may extend your liquidation period and lower your net recovery.