What you don't know (or do) can hurt your bottom line
Having inventory that can be sold quickly for cash is important. But if you can't offload that overstock of $100k items, it won’t really matter unless there’s a need for them.
So while inventory is one of the primary sources of revenue for the business, it can also be a huge liability. While many businesses, especially when starting up, focus on inventory management (the process of ordering, storing and using a company's inventory) they many not give as much attention to how the account for it. This can be a costly mistake.
Depending on your product, it carries the risk of spoilage, damage and theft. It also carries with it co for storage, insurance, shifting demand or seasonality, mis-shipments, overstock and other factors.
For these reasons, inventory management coupled with inventory accounting is important for businesses of any size. Knowing when to sell or restock inventory, what amounts to purchase or produce, what price to pay as well as when to sell and at what price can easily become complex decisions.
To gain a competitive edge, companies need to have an efficient and effective inventory acounting and management strategies. If neglected, inventory can quickly change from a company asset to an unwanted liability.
Fortunately, a good CFO or financial consultant can provide clear financials and make these decisions easier. We have some tips below to get started.
What is inventory accounting?
Inventory accounting helps determine the value and costs of maintaining inventory. Outside of the obvious, this data is valuable for setting competitive pricing, getting insured, budgeting, optimizing your supply chain, accurate taxes, selling your business, and more.
But the value of inventory can change over time, which makes keeping track a significant challenge.
This is where clear, accurate accounting and financial management can lend a hand.
There are several widely used ways to go about accounting for inventory. Choose an inventory accounting method that suitable for your business needs to maximize revenue potential, including tax liability.
- FIFO (first in/first out) – This method assumes the items purchased or manufactured first are used or sold first, so the items remaining in stock are the newest ones.
- LIFO (last in/ last out) – This method assumes items purchased or manufactured last are sold first, so the items remaining in stock are the oldest.
- Weighted average – This accounting method opts to average out the total cost of items available for sale against the number of units in inventory or purchased. Typically, this average is computed at the end of an accounting period.
Key financial and operational decisions are made based on the information in these financial statements, forecasts, and projections, including decisions that help you manage shortfalls and overcome industry-wide obstacles. Properly accounting for automotive inventory, whether by FIFO, LIFO, weighted average or by another method plays a vital role in ensuring an enterprise's short and long-term success.
Related reading: Taming the Beast That is Financial Reporting
Beyond record keeping: accounting for the value clear financial reporting
Inventory is the lifeblood of most businesses. A critical part of this is knowing what products you have on hand, how much it is worth, how to budget for it and also predict demand.
Benefits of a financial pro or outsourced CFO:
- Accounting for inventory directly impacts profit and taxation.
- Accurate data and inventory planning helps lower the costs of keeping items in stock.
- Clear accounting can minimize risk as well as make it easier to predict and shift with changes in demand.
- Management isn't just about the finished product, it is also accounts for a company's cash flow, labor and overall assets.
Proper inventory management and accounting can a business running smoothly AND reduce costs, improve cash flow, and boost a business's bottom line.
Need help figuring out if you have much inventory on hand at your company? Contact us for a free consultation today.
Learn more about managing your business finances
Any business owner knows just how chaotic it can be to manage finances and make strategic business decisions. Am I making payroll? How many total assets do we have? What are our liabilities?
Thankfully, answers to all these questions can be found in the balance sheet and with the help of our free cash flow template. Learn why it’s important for business owners and their accountants to understand their financial data, and how that brings them the freedom they need to grow.
If you don't have a team, or just need to supplement yours, try an outsourced CFO. Our fractional financial experts can work as your virtual CFO or in coordination with your financial department to ensure your reporting, inventory and strategy are aligned.
Is your inventory and supply chain optimized?
An optimized inventory and supply chain helps you deliver what your customer wants when your customers want it—and spend as little money as possible getting that done. Speak to our team of financial and operational experts about optimizing your inventory and supply chain.