Properly managing inventory is a complex task for many businesses. One way to increase the accuracy of your inventory numbers and speed the auditing process is by employing cycle counts. 415 Group Senior Manager Matt Campanale, CPA, delves into some of the best practices.
In my experience as part of the audit and assurance department at 415 Group, there’s no doubt inventory management is a crucial part to any small business. No matter the business you’re in, if you have inventory, this is a critical step towards accurate records and improved cash flow. Most small businesses don’t realize inventory is actual cash sitting at their facility.
As auditors, we’re required to verify inventory records and procedures for our clients during our audits. We encourage our clients to do frequent counts on their inventory to ensure they’re working with the most accurate inventory balances at all times. On top of that, an accurate inventory helps speed up the year-end closing process.
One way to improve inventory records and support accuracy is by performing frequent cycle counts. Infrequent counts often lead to large adjustments being made at the end of the year that can affect a company’s bottom line. Yet, there’s no magic formula on how often to conduct cycle counts on your inventory. We have a client that has a large amount of parts inventory. This manufacturer conducts weekly cycle counts due to the small size of their parts and a high number of SKUs. The key is having well-documented procedures to find a schedule to keep your team consistent.
We assist our clients by suggesting best practices for their inventory management. We meet with the actual people who do the counting and walk through their procedures. As needed, we observe the cycle counts personally. Understanding our clients’ business is how we provide quality solutions.
On one level, every company’s inventory is a carefully curated collection of inanimate objects ready for sale. But, on another, it can be a confounding, slippery and unpredictable creature that can shrink too small or grow too big — despite your best efforts to keep it contained. If your inventory has been getting the better of you lately, don’t give up on showing it who’s boss.
Check your math
Getting the upper hand on inventory is essentially one part mathematics and another part strategic planning. You need to have accurate inventory counts as well as the controls in place to regulate quality and keep things moving.
As is true for so much in business, timing is everything. Companies need raw materials and key components in place before starting a production run, but they don’t want to bring them in too soon and suffer excess costs. The same holds true for finished products — you need enough on hand to fulfill sales without over- or understocking.
If you’re struggling in this area, re-evaluate your counting process. One alternative to consider is cycle counting. This process involves taking a weekly or monthly physical count of part of your warehoused inventory. These physical counts are then compared against the levels shown on your inventory management system.
The goal is to pinpoint as many inventory discrepancies as possible. By identifying the source of accuracy problems, you can figure out the best solutions. Of course, you can’t conduct cycle counting once and expect a cure-all. You’ll need to use it regularly.
With all this data flying around, you need the right tools to gather, process and store it. So, investing in a good inventory software system (or upgrading the one you have) is key. As the saying goes, “garbage in, garbage out” — imprecise information coming from your current system could be leading to all those write-offs, inflated costs, missed sales and lost profits.
As always, you get what you pay for: Investing in a new software system and then paying ongoing maintenance fees (which are usually recommended to keep it running smoothly) could seem like a bitter pill to swallow. But, in the long run, strong inventory management can pay for itself.
Another way to use technology for inventory purposes is as a communication tool. Knowing which products are hot and which are not will go a long way toward developing correct purchasing and stocking levels. Consider using online surveys, email contests and even social networking (such as a Facebook page) to keep in touch with customers and gather this info.
Show some tough love
In an ideal world, every company’s inventory would be its best friend. But don’t be surprised if you have to regularly show yours some tough love to keep it from making a mess of your bottom line. Let us help you identify the best metrics and methods for managing your inventory.