Negative inventory is typically the result of a difference between actual on-hand inventory and virtual inventory as monitored and calculated by a computer system. This typically occurs when an error has been made or systems are not being updated properly, and indicates that products have been sold or transferred that should not have been. Issues with inventory can also arise when products are lost, then inventory adjusted to remove the lost products, and then they are found without readjusting the inventory.
The term may at first seem like a contradiction, since it implies that a business can have less than zero of a product, but it is a reasonable consequence of inventory management. It basically indicates that a business has sold products that are not actually there, or has sold products that were not part of the inventory record. This can occur due to miscommunication between systems. If a manufacturing company has sold an item before it has been made, then it is possible that the inventory system might show a negative inventory until the product is made and the count is corrected.
Negative inventory can also occur as a result of improper inventory counting or subtracting products from the wrong location at a business. If on-hand counts in a computer indicate that a store should have 12 of a particular item, but an employee is unable to actually find those 12 items, then they might be subtracted from the store’s inventory. This is typically assumed to have been caused by some form of shrinkage, and may be related to poor receiving practices or theft. If all 12 items are found and placed on the shelf for sale, without the store’s inventory being adjusted, then their sale can create a negative inventory for that store.
While negative inventory is not necessarily disastrous for a company, it can lead to poor record keeping and make inventory control more difficult. The store in the above example has lost profits, due to not having the item on the shelf, and may end up with too much of the product as new items are shipped to the store and the missing items are found. The situation can also come about if a company improperly tracks the same item at multiple locations. If there are 50 of an item at location A and 100 of an item at location B, for example, then 100 sales at location B incorrectly documented as coming from location A would create negative inventory at location A.