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6 Steps to Accurate Inventory

Author: Larry Chester, President

 

Every company has some large assets that are critical to the strength and operation of the company. The values assigned to them are shown on the balance sheet. Accounts Receivable, Prepaid Assets, Fixed Assets, Inventory. What steps do you need to take to make sure that these critical numbers are accurate?

For inventory, the issues are pretty clear.

  1. How much inventory do you have?
    1. How much do you have in stock? Knowing the answer affects whether you can do business. Your ability to accept orders, deliver to customers or build finished goods depends on it.
    2. What’s the value? The bank is going to value your inventory differently for lending purposes based on how quickly they can convert it to cash during a forced sale. So, they will lend you less on raw materials than finished goods. What is your value in these categories:
      1. Raw Materials
      2. Work in Process
      3. Finished Goods
      4. What is on hold in quality control?
  2. Is the inventory valued correctly? Inventory needs to be valued at the lower of Cost or Market. Is the current value reflected in your booked value? Are all the costs relating to the creation of your inventory rolled into your unit cost?
  3. Does your inventory valuation match your General Ledger? Pull an inventory value report from your computer system, and compare the total to your GL. Those numbers must match. If they don’t, make an adjustment.
  4. What are your inventory turns? This is a calculation that you should know, and the result should be a KPI you look at regularly. You should calculate it by item group and by item to help identify slow moving products.
  5. Have you done an ABC evaluation? Rank your items by sales volume.
    1. The top 70% of total sales are “A” items.
    2. The next 25% are “B” items.
    3. The final 5% are “C” items.
  6. Do you Cycle Count your inventory? Some companies don’t count their inventory at all – not a good practice. Some count their inventory once a year, at year end. But the most accurate method is to do weekly Cycle Counts. You count the fastest moving items the most, and the slowest moving items the least. Here’s the program.
    1. Count your “A” items four times a year
    2. Count your “B” items twice a year
    3. Count your “C” items annually
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