All businesses understand that the ability to track inventory is crucial to their business. Yet many continue to operate outdated systems without understanding the breaking points that indicate it’s time to change.
1. Tracking stock in multiple locations
A business rapidly becomes more complex when it adds additional channels for delivery. For example, bricks and mortar stores can add an online store and both can be serviced from warehouses in multiple locations.
Many SME accounting programs can only manage stock in a single location. A business often tracks the total stock in the accounting program and resorts to maintaining multiple spreadsheets to track stock across multiple locations.
By the time the business gets the information it needs it can be too late to act. Stock is either over or under-or-dered and more agile methods such as demand planning are impossible.
The situation becomes even more difficult when a business imports stock from overseas. Now it needs to tackle multiple currencies from an inventory costing perspective – but often accounting software only deals in one currency or doesn’t convert currency valuations automatically.
Carrying extra inventory ties up working capital. It also runs the risk of writing off obsolete inventory. Failure to meet demand is detrimental to both margins and customer satisfaction.
2. Using advanced costing methods/processes
Businesses carrying bigger inventories often require more complex accounting methods. However, even a small business could use a combination of three costing methods: FIFO (first in, first out, often used for perishables) stock accounting; lot-based costing (eg. in food processing); and weighted average, which tracks the average cost of production of a product.
SME accounting software usually only has a single costing method.
Again, a business typically turns to spreadsheets to manage the extra accounting required.
3. Manufacturing your own products
Even simple manufacturing is challenging without a system to manage the process. There are many costs to track – inputs and labour must be added to the cost of the finished product. Otherwise, it is difficult to manage yields or wastage, tasks that are cumbersome and prone to error when done manually.
Manufacturing is one of those industries where incoming and outgoing inventory in a warehouse needs to be tracked in real-time. Without this, it is too difficult to handle forward planning and re-ordering.
4. Switching between too many systems
Often, a business hitting the limits of its accounting software will augment it with additional systems and spreadsheets. A common example is to bolt on an inventory management system to software packages such as MYOB AccountRight or Xero.
However, systems integration can be a challenge, especially with desktop software. A business can end up with silos of information that must be updated separately. Disparate systems holding source data add unnecessary complexity and slow down decision-making.
Manual updating and reconciling between systems can work, but in an evolving and low-margin business environment, not for very long.
5. Uncertainty in levels of available inventory
This situation is usually the result of operating in a siloed manner. Only your accountant may have a clear idea of inventory levels because they are responsible for updating multiple programs. Often, it may not be practical to share a master spreadsheet or the spread-sheet may only be updated once a day or even once a week.
Effectively planning the right level of inventory requires knowledge of all sales orders and purchase orders. For example, you need to know when there is a surge in the sales of a particular product so you can order more stock. Likewise, your sales team can’t make promises to customers about delivery times if they don’t have confidence in the stock at hand. They may need to “check with accounts” before they close a deal rather than make the sale on the spot.
Companies that use their supply chain partners to manage inventory and customer shipments also need to know stock levels through that chain.
6. Getting the reports you want
Inventory value can be a significant portion of a business’s stated assets, and the recorded value in its books must match the physical value in the warehouse.
If inventory management systems are not integrated with a back-office chart of accounts, or reconciliation is attempted manually, errors that impact the financial integrity of company reporting can creep in.
This can have knock-on effects throughout the business. Accurate stock valuations are very important for insurance cover, the amount of cash at hand, and knowing a company’s level of debt.
Read our next blog, 'Why ERP can manage inventory better" to learn about the key advantages in managing your inventory in an ERP solution.
