How to: Avoid Inventory Accounting Headaches

Keeping track of your inventory is a lot of work. It’s technical, time-consuming, and a major source of frustration for many business owners. But it is necessary. Effectively managing your inventory can make the difference between growing a successful business and going out of business.

When profitable companies experience cash flow problems, the root cause is often an inventory accounting error. From inventory that doesn’t show up on the balance sheet to miscalculations in pricing and lead times, your biggest financial challenges can be traced back to your inventory accounting practices.

Here are a few tips to avoid inventory accounting headaches and keep your business financials in great shape.

1. Know Your Unit Economics

Does it seem like the more sales you make, the less money you have? If you don’t have a good understanding of your unit economics, you might be losing money on every unit sold. Unit economics refers to the direct revenues and costs associated with each unit of a product or service.

For example, kept.pro worked with a manufacturer to identify one of their products that was actually costing the company with each sale–the more of that product they sold, the more money it lost them. A quick decision to discontinue or reprice such a product can resolve the issue, but you have to be able to see the issue first.

2. Maintain Controls Through the Inventory Chain

Another common problem is having too many chefs in the kitchen when it comes to access and control of your inventory accounting system. Whether we are talking about simple spreadsheets or a robust inventory accounting software, it’s imperative to maintain control of the system from start to finish.

Take a close look at your policies, processes, and technologies and understand how these things work together to create a system. For example, how can your store-level employees manipulate your inventory? Are they able to source products from alternate vendors? Can they override pricing?

How about tracking raw materials? Do you have a way to capture deviations in pricing or availability? Accurately calculating COGS isn’t a one-time activity; it’s fluid and can depend on a number of variables that are constantly in play.

3. Count and Reconcile Inventory on a Regular Basis

Technology is great, but only when it’s accurate. Keeping your physical inventory reconciled with your accounting software is the only way that these tools will be useful in the real world. How often are you conducting physical counts? How often are those counts checked against the records in your software?

4. Use an Inventory Management System with Properly Configured Integrations

The right tools (aka inventory management software) can help you tame a nearly unmanageable beast. When choosing the right inventory management system, look closely at the features and integrations that the product supports.

You should ensure that the software offers native integrations with your existing tech stack. That’s half the battle. But you should also take the time to ensure that these integrations are set up correctly. One of the biggest reasons that fin-tech investments fail is because system misconfiguration or unstable integrations render them unreliable for the end user.

5. Use the Right Expertise

There is a lot that goes on behind the scenes when managing inventory accounting. Chances are, you didn’t start a business to spend your days buried in the technical aspects of business finance.

The right expertise can solve your biggest inventory accounting problems, ensuring that the policies, processes, and technologies are set up correctly and working well together. At kept.pro we can help you start the year off right with inventory accounting systems that work to keep your business running smoothly.

Contact our team to learn more about our accounting and bookkeeping support services today.