Keeping track of your inventory requires more than just counting items and stocking shelves.
Finding an accounting team that understands and offers inventory management solutions is extremely important. Proper inventory management is quite a complex process and getting it wrong can seriously affect the integrity of your financial reporting, understanding of the financial position of your business, ability to secure business financing, profitability, and cash flow.
Goods-based businesses that carry inventory include:
- Consumer packaged goods (CPG) companies with raw materials (ingredients, parts, or components), products in the process of being made or assembled, and products ready to go to market.
- Retail operations with bricks and mortar and/or eCommerce stores (food production, fashion, household goods, hardware, grocery stores, wholesalers, restaurants, etc.)
- Rental companies with gear or products to lease or rent
Our Virtual Accounting Team can help with implementing the right inventory management solutions and establishing or improving processes to track and measure your inventory. We help you learn to use the software with confidence and all the necessary routines and processes to keep your financial reporting on track.
When effective inventory management solutions are in place, your accounting team can help to determine and analyze all the costs your business incurs through your inventory so that you understand your profitability and profit margins. Depending on your industry, this can include determining things such as:
- Lot/Serial Number Tracking – especially important for items that expire or could be recalled
- Cost of Goods Sold (COGS) – the direct costs of producing goods as well as the costs of storing those goods
- Holding Costs – sometimes referred to as carrying costs — the amount of money you pay to store and hold items before they’re sold
- Economic Order Quantity (EOQ) – the best number of products your business should order (or re-order) depending on demand as well as minimizing the cost of ordering or holding stock (knowing this number can save significant money)
- Reorder point – the optimal time to reorder given not only current and future demand but also the lead time it takes to receive goods from your suppliers
- Landed Costs – how much it costs your business to buy, ship, store, import (because of duties and taxes), and transport inventory
- Safety Stock – sometimes referred to as buffer stock — the amount of inventory you should have on reserve in case of shortages from suppliers (this is very important for manufacturing or food production because a halt in production can be very costly)
- Deadstock – items that haven’t been used or sold or that are expired or outdated
Inventory systems still require that you check your inventory with a physical count of what’s on the shelves or in the warehouse in case of theft, damaged goods, or to account for human errors when stock is placed incorrectly or pulled from the wrong location. In food-related businesses, there are times that perishable products cannot be used but haven’t been reported.
When you manage your inventory well, you avoid many of the things that can negatively impact your gross profit margin. Poor inventory management can also lead to too much of your working capital (cash) being tied up in inventory and could mean the difference between success and failure.
Through proper inventory management, you should have the right stock quantities for what you need in the right place when you need it. If you manufacture goods, knowing the quantities you use to produce goods can help you negotiate optimal pricing for parts and/or raw materials. Not only will you procure goods at the best price, you’ll know what price to sell at for maximum profit — and you’ll be on guard against losses from product expiry or theft.
Implementing inventory management solutions allows for more sophisticated understanding of your company’s financial situation (especially beneficial if you hire a Virtual CFO!). With the insight of an experienced accounting team, you can also explore trends, such as customer behaviors and preferred products. This often informs future trends and ideas for new business opportunities. Plus, the more streamlined your ability to fulfill customer orders, the better your customer service can be.
Do you want to manage your inventory better? Please contact Finatics Accounting Solutions. We’d love to discuss how inventory management solutions can help you achieve your business goals.