Inventory management is hard to do, unbelievably boring, excruciating tedious BUT Extraordinarily Profitable.
Managing inventory is something the inventory manager must excel in. There are a thousand details to be managed and all at the same. The financial tools for monitoring and managing inventory are essential to success.
Happily, technology now offers astonishing tools to record, analyze, and report the internal workings of an enterprise reducing burdensome bookkeeping and other demanding tasks. Many commercial accounting software products include inventory management applications, which may also include connecting inventory to the main bookkeeping software. For example, third party applications for unique circumstances.
Inventory is managed at the adjusted accounts with ratio analysis. For example, the relationship of gross margin for a multi-year analysis, such as the following:
|Sales||Cost of Good Sold||Gross Margin||Gross Margin Ratio|
From this table it appears that there is a problem requiring analysis.
Keep in mind that gross margin is the sales less direct cost. Gross margin reduced by fixed cost, interest and taxes is profit. If the target profit is 10% of Revenues, the 4% decrease is 40% of expected profit. Some business owners might look into this.
Now comes the excruciating, boring, tedious task of finding out why gross margin is 4% lower in year 3 than years 1 & 2. The next level is to revisit individual component ledger accounts records to match this period to last period. Again, ratio analysis is used to identify exceptions.
If your state of the art accounting system is functioning, a quick consultation with inventory records, tracing inventory items from the issuance of the purchase order to final product, can be done. If revenues are $ 1,150,000 your loss is $ 46,000.
Whatever the threshold for significant error, can you easily locate the problem or learn to live with it?
In the information age very affordable accounting software is available enabling any enterprise to acquire to manage inventory. Implementing accounting software requires special skills that are readily available. If you need assistance, please contact me today.