I just received my closing entries from my CPA and my wonderful profit that I thought we had is now a loss. It was that darn inventory adjustment he made. How could my inventory be so messed up?
I was a CPA for years and this was a common scenario with growing businesses. There are so many moving parts in a growing company that inventory control and costing falls through the cracks; and entry level accounting systems do little to alleviate this critical issue. They concentrate on ease of use at the expense of handling complex accounting issues like inventory costing and tracking.
So what does a business owner do?
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Track – You need to account for everything that happens to inventory (e.g., Spoilage, damage, theft, incorrect vendor shipments, etc). You must be meticulous about tracking inventory.
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Manage – Manage inventory levels (e.g., look at sales trends, watch turns, optimize inventory around vendor lead times). Most owners fear that if they run out of stock they will lose the customer, so they overstock just in case. Holding inventory costs money; and what about obsolescence? Customer service is key but you can’t service customers if you are out of business. There are many methods of optimizing inventory levels. Pick one.
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Count – Start with the ABC system to classify inventory. Top 20% are A’s, bottom 20% are C’s and the rest are B’s. You can do this based on value or on turns. Start by performing a monthly physical count of the A’s, and when you’re happy with the results you can move it to quarterly. B’s should be at least twice a year and C’s once a year. Find the discrepancies and fix the issues. The differences should be getting smaller each time.
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Protect – Certain types of inventory have a habit of walking away. Institute procedures, both physical and process, to preserve the integrity of your products. Ensure that the correct products are picked and shipped. The cost of missed shipments goes beyond the product to customer satisfaction.
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Cost – There are several recognized inventory costing methods: FIFO, LIFO Weighted Average etc., but most entry level products don’t implement them or do it incorrectly. Your quantity may be perfect, but the adjustment is to correct the cost of inventory. This is hard for most business owners to comprehend as most of this is driven by GAAP (Generally Accepted Accounting Principles). The main purpose of GAAP is to ensure that all companies are consistently using the same policies to value their financial statements so the reader has a level of understanding and more important, confidence in the numbers.
Gravity Software® is a robust cloud-based accounting application written on the Microsoft Power Platform (aka Dynamics 365). Its multi-location, GAAP compliant inventory makes it easy for growing companies to control inventory. It is written with an intuitive web interface that is easy to use, but can handle complex accounting issues. Gravity fills the gap between entry level accounting software like QuickBooks and expensive enterprise applications. Learn more and schedule your online demo today. Just say GO!
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