The importance of stocktaking for your bottom line

Inventory, or stock, is one of the largest costs facing many businesses. In most cases, stock is bought with the intention of reselling to customers or use in manufacturing or construction, with the intention of making a profit.

While stock has value, and this value likely grows when the product is moved (sold to customers), it can also lose its value fast – for example, when the stock becomes out of date, damaged, ages or the market price of the product drops. Not to mention the associated costs of storing the product and opportunity cost of not having the cash you would have if it was not for buying the stock.

With stock playing such a pivotal role in businesses, how can you ensure your accounting processes and stock reporting is accurate and can be trusted?

A recent report involving a large ASX listed company (Freedom Foods) has highlighted the impact of poor accounting and reporting, with the company’s financials now being audited as its stock values have been reported incorrectly.

Incorrect stock reporting is one of the most common business issues amongst big and small-to-medium enterprises, particularly manufacturing, construction, wholesale and retail businesses, but one that can easily be remedied with effective processes in place.

Having your system aligned with what’s on the shelf, thereby giving you an accurate stocktake, ensures you are aware of how much stock you need to move or to reorder. With stock being recorded in the balance sheet at cost under current assets, it’s crucial to have an accurate stock report as this can have an impact on your bottom line and cash flow. Otherwise, you may find your profit and loss reporting will be spasmodic or, even worse, wrong.

To ensure accurate stock reporting, I recommend three key considerations:

 

Quarterly stocktake

Conducting a stocktake at least every quarter allows you to keep a more accurate track of the physical stock you have and to identify any discrepancies earlier. By undertaking regular stocktakes you’ll be able to address any issues quicker and potentially find ways to increase profit by being able to identify how product is performing and adjust pricing and ordering accordingly.

We have found for a lot of businesses a quarterly stocktake is sufficient to provide accurate financial reporting and understanding of business performance, without the impost of having to complete this monthly.

 

Systematic approach

Consider implementing systems that can help track your stock. The key consideration is incorporating these systems as soon as you can, so your reporting becomes more accurate. 

This is also the biggest challenge. The most common challenge we see our clients face is the implementation of a high price Enterprise Resource Planning (ERP) system which is designed to track stock and incorporate this information into the financial reporting and the system fails to deliver.

This is an article unto itself but the key to successfully implementing an ERP system is ensuring team members are appropriately trained in the system itself, and they are disciplined in their approach to using the system otherwise it will literally be an example of “garbage in, garbage out”.

 

Consistent review of reports

It’s important for management to review the monthly financial reports that are being developed consistency. An ongoing commitment to reviewing these reports may help you identify inaccuracies sooner.

If you’re an owner or manager of a small-to-medium enterprise and you don’t trust the financial information being presented to you as part of your stock reporting, CFO Dynamics can help review your information and develop strategies and systems to assist in managing stock and wider financial and business decisions. Get in touch with us today!