Inventory management = Quantity x Valuation

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Inventory. Always a difficult subject whether you look at it from the physical side or the accounting side.

When we look at inventory we are mainly concerned about when to order and how much to order. In fact, the market abounds with companies that offer inventory management services to deal with these two questions. But the driver for applying EOQ, JIT or advanced statistical tools for forecasting is not just the management of stock levels but the management of profit.

Without a proper stock valuation method in place, it is difficult to manage profit margins – which, after all is said and done, is a key performance indicator for most businesses. So imagine my surprise when I discover that most SaaS products on the market can’t give me complete control over my inventory and stock valuation.

Once the stock take finds out whether (or normally, what) is missing and what is left, there is the process of judging how much to reorder to meet expected demand. I know JIT is the modern method, but it will never replace proper planning, especially if your business volumes vary according to the weather. If nothing else the cash flow needs planning.

On the accounting side I was surprised to learn that, for the small business owner, there are systems out there that don’t reflect the practicalities of managing inventory.

Although we don’t publicise it, returns are made that need to be accounted for and spoilage happens that also needs to be reflected in the accounts. If your systems don’t have a function that allows you to account for returns (whether they can be resold or not) and won’t recognise spoiled and un-saleable goods, then how can one keep a proper record without having to resort to a spreadsheet?

Valuation. This does depend on where you live and to what standards you have to conform. In UK the Accounting Standards Board requires First In First Out and Weighted Average accounting treatments. So imagine my surprise when I heard that this method is not actually followed by accounting systems sold over here.

So beware. Some systems sold in this country will require you to run more spreadsheets – unusual for a software package to require you to increase your administrative complexity rather than allow you to get rid of all those separate, manual, spreadsheets
Maybe I’m old fashioned but I prefer the software I use to reflect the realities of business.