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Wrestle Back Control of Your Inventory
Three ways to get off the mat
June 14, 2010
When it comes to inventory, the recession and its slow recovery have left many companies in a precarious position. Either they have too much inventory and nowhere to move it or they’ve run low and can’t afford to produce or procure more.
Now that the worst is over economically (we hope), it may be a good time to wrestle back control of your inventory. Here are three ways to get off the mat.
Check your math
Getting the upper hand on inventory is essentially one part mathematics and another part strategic planning. You need to have accurate inventory counts as well as the controls in place to regulate quality and keep things moving.
As is true for so much in business, timing is everything. Companies need raw materials and key components in place before starting a production run, but they don’t want to bring them in too soon or else they’ll suffer excess costs. The same holds true for finished products — you need enough on hand to fulfill sales without over- or understocking.
If you’re struggling in this area, it may be time to reevaluate your counting process. One alternative to consider is cycle counting. This process involves taking a weekly or monthly physical count of part of your warehoused inventory.
These physical counts are then compared against the levels shown on your inventory management system.
The idea here is to drill down and pinpoint as many inventory discrepancies as possible. By identifying the source of accuracy problems, you can figure out the best solutions. Of course, you can’t conduct cycle counting once and expect a cure-all. You’ll need to use it regularly to start eliminating your inventory accuracy problems.
Use technology
With all this data flying around, you need the right tools to gather, process and store it. So investing in a good inventory software system (or upgrading the one you have) is key. As the saying goes, “garbage in, garbage out” — imprecise information coming from your current system could be leading to all of those write-offs, inflated costs, missed sales and lost profits.
As always, you get what you pay for: Investing in a new software system and then paying ongoing maintenance fees (which are usually recommended to keep it running smoothly) could seem like a bitter pill to swallow. But, in the long run, strong inventory management can pay for itself.
Another way to use technology for inventory purposes is as a communication tool. Knowing which products are hot and which are not will go a long way toward developing correct purchasing and stocking levels.
Consider using online surveys, e-mail contests and even social networking (such as a Facebook page) to keep in touch with customers and gather this information.
Take desperate measures (if you must)
For businesses with severe excess inventory problems, desperate measures are sometimes the only way out. You may be able to sell the overage at a discount to a liquidator or scrap dealer.
If you’ve sold at a loss, you can deduct the excess of your cost basis over the sales price on your income tax return. To be eligible for the deduction, however, the sale must be “bona fide” — you can’t hedge your bets by retaining the right to buy the inventory back at a discount.
You also could donate some inventory to charity. Ordinarily, your charitable deduction is limited to the property’s cost basis (or, if less, the property’s market value). C corporations, however, may be able to qualify for an enhanced deduction if the donation is intended for the ill, the needy or children. The deduction is limited to the inventory’s cost basis plus 50% of any appreciation in value (but no more than 200% of cost). It’s also subject to general limits on charitable deductions.
Ignoring and improving
In a time when cash flow has never been more important, an improperly or inadequately managed inventory system can drag down your revenues. Make sure you’re not ignoring the items on your shelves while trying to improve the numbers at your bottom line.
Two primary inventory accounting methods
Generally, there are two primary inventory accounting methods for both tax accounting and financial accounting. They are:
Last in, first out (LIFO). If you tend to retain inventory items (such as repair parts or durable goods) for long periods, LIFO may always be your best choice. It allows you to allocate the most recent (and, therefore, higher) costs first, ideally maximizing your cost of goods sold and minimizing your taxable income.
First in, first out (FIFO). This refers to selling the oldest stock first. Generally, FIFO works best with dated goods, perishable items and collectibles. In an inflationary market, this approach usually results in higher income as older purchases with lower costs are included in cost of sales. (In a deflationary market, the opposite generally holds true.)
Of the two, FIFO is used more often because it more genuinely reflects the typical normal flow of goods and is easier to account for than LIFO, which can be highly complex and deals with inventory costs (not the actual inventory) that may be many years old.
If you’re dissatisfied with your company’s method, you may be able to change it. But doing so is far from simple. Should a business wish to change its inventory accounting method for tax purposes, it needs to request permission from the IRS. And if it wishes to change for financial accounting purposes, it needs a valid reason. This is why changes in accounting for inventory are rarely seen.
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