If you own a manufacturing, distributing or retail business, I don’t need to tell you that inventory is a major factor on your bottom line. But I’m bringing it up because so many clients that I work with treat their inventory as if it’s only “stuff” that takes up space on their shelves or in their warehouse.
That’s the wrong way of thinking about your inventory, and it’s an attitude that can do great harm to your operations. You need to think of and treat your inventory as cash, because it’s that important to your business. After all, you had to spend cash to get it to your shelves, correct?
You wouldn’t leave piles of cash lying around on a shelf in your warehouse or on a desk somewhere. That’s just asking for someone to take advantage of you, and for your business to take a loss. But so many business owners don’t put the proper controls in place to prevent theft or loss.
When you are busy making sales or keeping customers happy, making an effort to keep count of your inventory may seem like time you don’t have. But I’d argue that if you don’t make the effort, inventory control can doom your business.
Here is what I insist that my clients do to take and keep control of their inventory:
- Inventory must be counted regularly, and I’m talking about counting everything that’s for sale on your shelves or is stored in your warehouse. Decide on your schedule for taking inventory based on how quickly products move in and out of your warehouse. In some places, inventory is still done with notebooks and pencils, but there are plenty of software applications and handheld scanners on the market that can make the process relatively easy.
- Designate one person whose responsibility it is to control inventory and ensure the count is done properly.
- These counts must be compared to your books and your books adjusted accordingly. I can’t stress enough how important it is to do both tasks each and every time you take inventory.
- Secure and properly store all inventory in your warehouse or facility.
- Restrict access to your storage area and track who goes in and out. This can be done easily with access doors that are locked and unlocked by swiping an employee’s ID card. If that’s too high tech, use a padlock.
- Put a policy in writing that nothing should be able to be removed from inventory without proper authorization or documentation, and treat inventory that goes “missing” as a serious offense.
I make a big deal about inventory management for one simple reason – if you don't count, manage and track your inventory, how can you identify if you are selling it at a profit?
Want more reasons? What if you receive a large order from a new customer that is time-sensitive, only to find you don’t have the items in stock because your computer records haven’t been adjusted for recent sales? Good luck explaining that. What if your business has a line of credit that is tied to keeping your inventory at a certain level, but because you haven’t done a manual count for 12 months, you fall short of bank requirements and are unable to borrow money? Finally, what if you do a count at year-end at the insistence of your tax preparer and find that you have a lot more inventory than you thought you did? That can result in a big tax issue that neither you nor your accountant would have seen coming. These are all scenarios I have experienced firsthand in my years of working with clients.
So do you have the time to track your inventory? Of course you do.
Robert J. Rickert CPA, PC focuses on giving its clients timely, accurate and relevant financial information to help them make informed decisions about their businesses. The firm provides customized solutions to meet the specific needs of its clients. Services offered by the firm include CFO and controller services, crisis management, interim financial management, acquisitions and business buying, divestitures and business selling, litigation support, business tax services, and tax dispute assistance for individuals. For more information, visit rickertcpa.com, call 910-319-9127 or email [email protected].