Do you have a clear picture of your business’s inventory? Business owners will often go far too long without reviewing their inventory, only to find out it’s in desperate need of cleanup.
The problem with keeping accurate inventory records is that it can take significant time and resources. This is why many small businesses put it off until their tax accountant starts asking for it at year-end. While the year-end inventory count is a valuable internal control, only checking inventory once a year can lead to incorrect information accumulating over 12 months. Outdated information about inventory makes it difficult to monitor and improve the performance and profitability of your company.
Fortunately, there are alternatives to manually counting your entire inventory multiple times a year.
How to leverage inventory management to improve your profitability
Why is inventory management so important to performance and profitability? Well, when inventory is your core business asset, it can quickly become your main liability. All too often, products sitting on hand can lose value, depreciate, or become a complete loss over time. When that happens, it can reduce your purchasing power or ability to expand the business due to a lack of cash. On the flip side, maintaining insufficient inventory can lead to supply chain issues that leave you incapable of fulfilling orders.
With up-to-date insights into the inventory on hand, business owners can use the data to:
- Identify which products are selling or sitting
- Identify which products have the highest profit margins
- Reduce unnecessary overstocking
- Properly determine costs of goods sold (COGS)
- Increase liquidity
- Decrease waste
- Improve cash flow
Common inventory issues and how to fix them
Inventory records can go awry for a few different reasons. Some of the most common reasons are theft, inaccurate reporting, and issues with your inventory management procedures.
In the simple, but unfortunate, case of theft, it’s difficult to identify and prevent when you only count inventory annually. Issues with your inventory management procedures can snowball over twelve months and take time and money to unravel and correct.
A common issue we come across is when businesses value inventory at retail price rather than wholesale cost. Doing so can inflate your books, giving an inaccurate picture of your financial health. For tax reporting purposes, inventory should be accurately valued at its cost to acquire in order to ensure compliance and avoid potential penalties.
Another problem we often see is a lack of proper procedures for recording transactions. Accurate inventory data depends on correct input. Mistakes in recording inventory, whether due to manual entry errors or inconsistent procedures, can result in incorrect outputs—such as inflated COGS or inaccurate profitability reports. Over time, these errors can undermine your ability to make data-driven decisions and prepare accurate financial reports.
The good news is that these mistakes can often be remedied with a little accounting automation that cuts out human error.
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3 ways to spot-check your inventory
Spot-checking inventory can be a form of internal audit that helps you to identify and address small problems before they grow. The best way to spot-check inventory is with a cycle counting system. Instead of doing an entire physical count monthly or quarterly, consider spot-checking different portions of the inventory at a time.
There are three major methods of cycle counting that we recommend:
- Random Count: As its name suggests, a random count focuses on a random selection of inventory materials. Random counting is probably one of the best ways to identify and prevent theft. With no announced system for what inventory is going to be checked, a thief is taking their chances.
- Block Count: This method organizes inventory into specific sections or blocks, which are counted on a rotating schedule. While the system is structured and predictable, it provides a comprehensive way to identify issues within your inventory management processes. For example, if most invoicing items are accurate but one contains an error, a block count can pinpoint the discrepancy early, allowing you to correct it before it escalates.
- ABC Count: The theory behind an ABC count is that 20% of your inventory represents 80% of your inventory costs. This can be especially true if you are manufacturing larger equipment or specialize in sales of certain items. The idea with the ABC count is to focus on higher-priced inventory items and leave the smaller items for the year-end count. If your inventory management processes are set up properly, there is definitely a cost benefit to focusing and simplifying your count throughout the year.
Remember: Even with cycle counting in play, a physical count at year-end is essential for tax compliance. Tax authorities require accurate reporting of inventory at cost, and discrepancies can result in costly audits or penalties. Ensuring your year-end numbers are correct safeguards your business against these risks.
Top tip: Automate inventory management
If your inventory management processes consist of manually recording inventory in Excel, you could be exposing the business to unnecessary risk and wasted time. Adopting a cloud-based inventory management solution, such as CIN7 Core (formally known as DEAR), can automate your inventory management processes. Using an automated solution reduces the risk of making human errors that can cause major discrepancies down the line and eat up valuable time. CIN7 can integrate with your central accounting system, such as Xero, to seamlessly relay data, eliminating the need for double entry.
Another option: if you have light inventory, consider using Xero’s inventory functionality. We find it’s best for ecommerce businesses, such as those running on Amazon or Shopify.
Whichever option you choose, a cloud-based inventory management app is key to having real-time insights into the business’s inventory data at any given time, from any supported mobile device. Need to check inventory at an event, or out with a client? All of the information you need is at your fingertips. With an inventory app, you reduce the frequency of manual inventory counts, saving valuable time.
Inventory management apps can also provide business owners with valuable reports on the profitability of products, timelines, and other supportive data. Business owners get the information they need to make well-informed decisions regarding products, vendors, and pricing.
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Take control of your inventory for better performance and profitability
Whether you use a spot-check inventory strategy, adopt a cloud-inventory management app, or run a combination of the two, the business will be in a better place to improve total performance and profitability. If inventory is your main asset, you should treat it that way and make it a top priority to enhance your inventory management.
If you’re unsure where to start, or which inventory management solution is best for your business, send us a message. We can discuss your business, current processes, and goals to develop the right strategy for your inventory.