If your business sells products then you need to know about stocktaking. Stocktaking is also known as inventory counting. It is the term for keeping track of what you have bought, work-in-progress and finished items that are not yet sold.
It is important to keep an inventory of items so you have an accurate valuation of your stock. This helps ensure your balance sheet reflects the company’s assets correctly.
If it sounds overwhelming for small businesses, don’t worry. Even large businesses can fall foul of poor stocktaking!
In 2019, fashion brand Ted Baker was forced to make an announcement that it had overstated the value of its inventory by £20 million! That means its gross profits were too high. What that meant was its current assets and income tax expense was also too high. It resulted in the business losing millions in its value to shareholders.
Businesses overstating inventory can end up with cash flow issues. So, it’s important to get on top of your stocktaking.
What do I need to know about stocktaking?
Failing to understand the importance of inventory counting could mean your business isn’t as healthy and efficient as it should be. There are several reasons why inventory or stocktaking helps businesses, including:
Prevents overstocking and stock-outs
If you’re not keeping tabs on your inventory, you could end up with a stock issue. Ordering items that are not selling well means you’ll end up with too much of certain items. It could be devaluing while it sits there for months on end. As a result, you might need to sell at a lower price to move the stock. This hits your bottom line and reduces profitability.
And then there are stock-outs. This is where you end up running out of stock. If you have a popular item and run out, customers could go elsewhere. This might mean they don’t come back, so inventory counting is crucial.
Theft prevention
It is unfortunate, but some employees do like to help themselves! Latest data suggests that there was a 19% increase in employee thefts. The study reveals almost 6,000 workers were stealing from employers! Regular inventory means discrepancies are uncovered, which might indicate theft before it gets out of hand. Inventory counting is, therefore, crucial for reducing loss and increases security.
Helps make financial decisions
Understanding what stock is slow to move and what is popular helps you make decisions about finances. You can invest in stock that sells quickly and boost your profits and cash flow. That’s better than using your cash on stock that won’t move and hits your bottom line.
Reduces holding costs
It costs money to holding onto excess stock. Getting a grip of your inventory counting means you can adjust your ordering and stocking practices. You don’t want to spend money on space or storing goods that aren’t moving. For example, if they need refrigeration or special conditions you may be spending money on storage you don’t need.
Better efficiency
Inventory counting improves your efficiency because you physically know what stock is moving and what isn’t. When uncovering inconsistencies you can establish new protocols for greater accuracy. In turn, this leads to increased efficiencies in your warehouse operations.
Compliance
Some businesses must comply with industry regulations or customer requirements and physical counts. This data shows industry regulators that your business is meeting their rules. By neglecting stocktaking, you could end up breaching regulations, which can pose a risk to your business.
Better management of finances
As well as understanding your customers, stocktaking also helps your financial management. This includes the cost of goods sold (COGS) calculations and tax reporting. Keeping your stocktaking under control can help reduce errors in financial reporting. That not only means you are compliant, you’re also paying the correct amount of taxes, so your business is in good shape.
How do I start?
If you need help understanding stocktaking – or inventory counting – then contact our team today for a no obligation chat. We help business owners make sense of the numbers and remove the stress of all things accounting and tax related.
