Making an account for inventory is essential for any local retailer in 2022, as it ensures you are fully aware of what items you have in your stock and their value. You use the information from your inventory accounting to make crucial decisions, from when to place orders to pricing.
Explore this type of inventory management in more detail to ensure that you make the most of it.
What is inventory accounting?
With inventory accounting, you value and track changes in your inventory. The process involves assigning values to each of the items and recording them. This lets you keep track of your company’s assets.
One essential part of this type of accounting is valuing the various items in the inventory. There are many reasons that your inventory items may have changing values, including:
- Changes to customer taste
- Decreased market supply
- Increased demand
- Deterioration
- Depreciation
- Obsolescence
As a refresher, your inventory includes the following:
- Products you install
- Merchandise you resell
- Goods you manufacture
By regularly managing and accounting for your inventory, you can:
- Maximize your sales by ensuring in-demand products are in stock
- Reduce your costs by knowing what to buy with bulk discounts
- Reduce storage costs by reducing orders for low-demand products
- Reduce waste by tracking product expiry, theft, and damage
- Look for seasonal trends to help with marketing
- Compare margins across products to see which bring in the most profit
How has inventory accounting changed since 2020?
The most significant changes in inventory accounting in the last few years have come as a direct result of COVID. The pandemic made it nearly impossible, if not downright impossible, for many business owners to track their inventory in person and take care of accounting for it. This meant that more businesses began looking for alternatives to in-person inventory days.
One of the simplest adjustments was moving the days designated for inventory planning. Some retailers moved their inventory days back until they could have enough staff in their store to complete the process. Others moved it up.
There has also been an increased reliance on inventory planning software to some extent. Traditionally, businesses take the time to regularly go through the inventory to confirm the information in their inventory software. Some have had to rely on the software more, without the ability to check its accuracy.
Another significant change was the increasing demand to access inventory planning software from anywhere. This lets business owners check the status of their inventory and perform the necessary accounting even if they can’t go into the building. This helpful software helped retailers grow their business.
What is inventory shrinkage?
Shrinkage is an essential consideration for any inventory job. It is also one of the biggest reasons to physically go through your inventory and confirm that it matches what is listed in your software.
Inventory shrinkage refers to the inventory on your accounting records that you do not actually have.
You can calculate shrinkage by calculating the total value of your actual inventory and subtracting that from the value your records indicate should be in stock. Divide that value by the total inventory value in your records to get a percentage.
Shrinkage is important to understand because it affects your bottom line. While some amount of shrinkage is expected, if it grows too large, this will essentially mean you spent money on products that you now cannot sell. It is essentially wasted money.
To prevent inventory shrinkage, you need to determine which causes are to blame and then make the necessary adjustments.
Causes
There are many potential causes of shrinkage in your inventory, including the following.
Employee theft
Theft of the inventory is among the most common causes. Sometimes, that theft is done by employees. In this case, employees would take advantage of their access to your goods or products and steal them.
You can reduce this cause by reducing general employee access to your inventory or your inventory management tools. You can also add security cameras to your warehouse or storage space. Assigning employees personal responsibility for the accuracy of the merchandise can also help, as that increases the chances that you will catch an employee if they steal.
Consumer theft
Theft from customers is another common cause of shrinkage.
You can also reduce this by improving security or surveillance, such as using security cameras. You could also put security tags on items and remove them at the register.
Vendor fraud
Employees and customers aren’t the only ones who can knowingly steal from you. Although less likely than the other causes, vendor fraud can also be an issue. For example, maybe your supplier left out a few items to increase their profits, operating on the assumption that you wouldn’t notice.
You can reduce the risk of vendor fraud by always counting and recording your shipments.
Management errors
Sometimes, the shrinkage is due to management errors or other human errors.
Maybe someone miscounted an item or accidentally typed the wrong number into the software. Or perhaps you weren’t using the same units of measurement each time you counted the inventory. For example, maybe you note the cases of items when physically counting but then record the number of individual items in the software. This could lead to a discrepancy if not all the cases were full.
Damages
Every store will also have to deal with some shrinkage due to damage. It is unfortunate that not every product will remain in good condition. Sometimes, they get damaged in transit. Other times, they are damaged on the shelves or accidentally damaged by customers.
If the damage occurs because of a poor picking process, change your warehouse operations policies to ensure your goods remain undamaged.
Advantages of inventory planning
Inventory planning is crucial for your company, as it lets you track your inventory and lets you make important decisions related to it.
The main goals of this type of planning include forecasting or estimating, controlling costs, and efficient storage.
Inventory control
Inventory control refers to receiving, unpacking, verifying, storing, and issuing inventory. It is crucial for your restocking systems, including figuring out how much to reorder.
Material requirements planning
Inventory planners can also help you with material requirements planning (MRP). This strategy enables you to keep your inventory levels at optimally low levels while also ensuring you have regular deliveries.
MRP involves evaluating your current stock as well as upcoming and planned orders. You then calculate what other stock you will need and order it.
Other advantages
With inventory planning models, you can control your inventory. Simply put, you can get a better idea of how much of a given product you need to order and when to do so.
With proper planning, you can reduce the costs of keeping items in stock by preventing over-ordering. At the same time, this process lets you ensure you have enough inventory to keep up with demand. This results in higher profits and helps you maintain cash flow.
Planning also lets you retrieve additional products from your stockroom or warehouse more easily. And it helps minimize theft and other causes of shrinkage.
Inventory replenishment models and strategies
As mentioned, one of the most important reasons to do accounting for inventory is to ensure that you know when to replenish your stock and how much to order. But there is no single correct inventory replenishment model. There are several that you can choose from.
Inventory models
The following are the main models for replenishing your inventory:
- Demand replenishment – This model relies on your forecasted demand. It usually involves just ordering enough stock so you can meet your predicted demand. The caveat is that you will need some backup inventory if you underestimate the demand.
- Lean time or top-off replenishment – This strategy is much more opportune and fluid than the others. You look for convenient times when the demand has slowed. Then, you bring your inventory from the warehouse to primary inventory to “top off” your supply there. This method is the most common in fast-paced sectors.
- Periodic ordering – With this model, you choose set intervals to check the stock and see if anything needs to be ordered. For example, maybe you conduct an assessment and order every month or every few months.
- Reorder point – If you follow this model, you will look at the stock levels to see when to replenish the inventory. The only caveat is that you need real-time inventory tracking to use this method. For example, say you usually have 100 of a product in stock. If you set the reorder point to 20, you would order 80 more of the product when you only have 20 left.
Lean inventory tips
Lean inventory management has the primary goal of reducing waste while putting customers first and optimizing production. By reducing the waste leftover after manufacturing, you can reduce costs.
Keep the following tips in mind with this strategy:
- Focus on costs, not outcomes
- Concentrate on value streams
- Invest in the people on your team
- Keep things simple
- Stop production to deal with issues when necessary
- Prepare for uncertainty and make changes quickly
- Put yourself in the customers’ shoes
Conclusion
Accounting for inventory is a crucial part of inventory management, and every business needs to have a strategy in place for it. This will help with planning for your inventory as well as reducing shrinkage and planning replenishment.
