The 6 Most Common Inventory Accounting Mistakes and How to Avoid Them
Reading Time: 3 minutes
Inventory accounting and management are key components of any wholesale business—product generates the revenue that keeps a wholesale business going. But it can also be a cash drain, and tracking inventory is complicated and errors are costly.
Inventory issues are a common reason for wholesaler losses and the most common mistakes include:
Inventory turns and other key metrics aren’t properly measured
Employees aren’t properly trained on software and processes
Forecasts aren’t properly made, resulting in poor planning
Systems lacks automations like file exchanges and integrations
Inventory testing isn’t performed or isn’t accurate
Misstated ending inventory and it’s value
When inventory accounting is incorrect, the balance sheet is affected. The value of assets is incorrect.
Stay Aware of Mistakes is the Key to Preventing Them
1. Inventory turns and other key metrics aren’t properly measured
Mandatory tracking should be implemented and reviewed on a regular basis. What is the ratio of inventory to sales? Track it overall and by segment to identify both slow moving and fast moving categories. Take markdowns and direct your cash in fastest moving categories. Of course keep margins in mind when making those decisions. Some wholesalers utilize metrics like GMROI to help make those decisions.
2. Employees aren’t properly trained on software and processes
If you are handling your back office in house not only is it important to hire the right people, wholesalers need to make sure the employees are trained in the nuances and complexities of inventory management. Software systems have lots of capabilities but your team needs to know how to use them. If you are outsourcing your back office take a close look at their inventory reporting capabilities.
3. Forecasts aren’t properly made, resulting in poor planning
Forecasting can be tricky. You can make it a bit easier by segmenting your business. FOB overseas and POE related inventory is pretty straight forward. Direct to consumer, FBA, and direct to store replenishment can be trickier. Segmenting your inventory and orders can make your forecasting much easier and more accurate.
4. Systems lacks automations like file exchanges and integrations
Automation can improve your inventory’s accuracy. File exchanges for expected receiving, new items, and orders not only improve accuracy but can help speed order processing. Integrations with other platforms are critical for direct to consumer sales. For example, you can use UPS Worlships’s API to make sure small freight is really on the move and not just sitting on the warehouse floor, missing it’s delivery window, and then in need of being returned to inventory.
5. Inventory testing isn’t performed or isn’t accurate
Depending on whether you are discovering lots of short shipments or lost freight you may want to implement inventory testing. Performing a full physical inventory is costly, time consuming, and can disrupt shipping. On a regular basis you can select a small number of items and have the warehouse do a physical count. You will need to make certain all orders are processed when you reconcile their count with your system information.
6. Misstated ending inventory and it’s value
When inventory is misstated at the end of the year, it is wrong at the beginning of the next year. SO make sure you do a physical inventory at the end of the year. In addition, having the wrong inventory value at the end of the year means that your profit and profit margins on your financials are not accurate. Review your inventory at the end of the year and make an accounting adjustment for the reduced value. That way you are operating with a truer understanding of your profit margins as you make decisions during the following year.