Consistent inventory management is the most effective way to protect a business from plummeting products and inventories, overstocking, damage, and other challenges.
By Chris Martin, CPA, CGMA on September 3, 2021
Inventory management is one of the most important strategic initiatives a company takes consistently to maintain its competitive advantage and profitability margins. Organizations must use a consistent, systematic process to manage raw materials and finished products that encompasses all aspects of inventory management – from sourcing and storing to selling inventory. A company that properly manages its inventory will have the right amount of the right inventory at the right time and at the right cost.
Business leaders need to control inventory to avoid losing opportunities because items are sold out while making sure they don’t lose when excess inventory is on shelves.
Those who use inventory monitoring best practices typically first focus on the company’s internal controls, including the processes for ordering, receiving, and shipping goods. Second, they maintain an efficient system based on strict controls and cycle counts.
Internal controls: Accuracy is critical in determining how much and when to stock up. When a company is unsure of how much inventory they have, they cannot make reorder decisions.
Cycle counting: Careful and regular review of inventory levels can help business owners stay one step ahead of a potential crisis. It is important to know which items are moving off the shelves quickly and which items are on the shelves.
The two most common inventory management systems used are permanent and periodic.
A permanent inventory system is one that allows instant tracking of sales and inventory for individual items. This system records the sale or purchase of inventory instantly using computerized point-of-sale systems and enterprise asset management software.
Periodic inventory is another option for inventory management by recording purchases. Inventory fluctuations are not recorded continuously. Instead, the inventory account in the periodic inventory system is updated at the end of a billing period and not after each sale and purchase.
Both inventory methods have advantages and disadvantages, so the determining factor is the company’s culture, its philosophy, the types of goods or goods it has in stock, and other factors that affect the executive team.
The main goal in setting up and maintaining an inventory management system is to give business executives the confidence that they have the current and relevant data they need to take full advantage of future opportunities.
About the author
Chris Martin, CPA, CGMA is a member of SobelCo. He works in the Accounting and Auditing Practice and leads their Food and Beverage Practice.