Inventory management is the precise control of a business’ inventory incorporating raw material, WIPs (works-in-progress) and completed goods. The reason why inventory must be managed accurately is that it costs money to acquire or make and therefore if not controlled properly, it can represent a huge money drain to the company. Therefore, a large part of effective inventory management is effective accounting. Let us consider some good accounting basics for inventory management.
Value stock on a rolling basis
Some businesses value their inventory stock periodically, for instance on a month-by-month basis. This may seem systematic and logical, however it can easily give rise to discrepancies in inventory stock counts and valuations. This is for a number of reasons including the continuous ordering and replenishing of supplies that does not adhere to a strict monthly cycle and the occasional failure of staff to conduct necessary stock counts at precise times.
‘Rolling stock on hand’ is the term given to a more continuous method where the books are increased by the value of any purchase orders received and then reduced by the value of any cost of goods sold (COGS). Two predominant benefits support this method namely an accurate profit and loss statement available at any given time; and this statement being based on sales and COGS rather than the actual inventory stock count in the warehouse, lending itself to increased accuracy.
Marry up the sales and COGS
Businesses run into accounting hot water when the sales and COGS are assigned to different months. To ensure all the books tally up, particularly if the company operates on a month-by-month basis, the COGS should always be posted to the month the sale is made, even if this requires back-dating it.
Correctly dealing with landed costs of inventory stock
It is difficult to ensure all costs are married up and compensated for when, no matter how organised you are, your suppliers take weeks to bill and therefore put everything out of sync. This can occur when inventory stock has been ordered and receipted at the shipping dock with all customs fees paid, yet the transport company bill remains outstanding. The correct way to assign the cost when the bill actually comes (despite the fact that the product that incurred the bill is already sold) is to attribute the cost to COGS and backdate it to the month of sale.
Simplify life with batching
Internet and cash sales can be considered as groups rather than having every detail recorded about each one, creating copious data which is seemingly useless. Therefore, it can help to minimise the paperwork by batching sales before importing them into the accounting software, and a sensible interim would be comparable to a bank’s processing period.
Avoiding the works-in-progress headache
Accounting for works-in-progress can often be more trouble than it is use. It is difficult to accurately project costs and what data is available can be time-consuming to obtain. Therefore, it is suggested that a more sensible option would be to assign the sale and the COGS to the month in which the product was actually completed.
Inventory management is the umbrella to many essential practices that need to be in check for its success. Accounting practices are one aspect of inventory management and special attention needs to be paid to the way they are carried out and the affect this might have on inventory stock control. Consider a software inventory management system that has been designed with these points in mind and exists to take the angst out of effective inventory control.