Is your inventory not reconciling?

If you just performed an inventory count, your next step in the process is to reconcile your inventory count results against your accounting records.

The purpose of an inventory reconciliation is to gain clarity on the amount of inventory your business has on a certain date. When you perform a physical inventory count, you have counted what is physically on site. However, this number might not be what is included in your books or records.

An inventory reconciliation, reconciles the your physical inventory count to what is included in your books and records.

You should expect to see inventory variances during your reconciliation.

For example, if you have goods in transit to customers, but have not yet sent out the invoices, you may have an inventory variance.  On the other hand, if you received products from your vendors, but have not yet issued a purchase order, you may have an inventory variance.  If you cannot identify why you have an inventory variance, you may have SHRINKAGE.

Shrinkage is the loss of inventory that usually is related to factors such as theft, error, fraud, and damage.

If you are working in the cannabis industry and you have a large percentage of shrinkage, you have a problem, because you may not be able to write off your inventory loss.  

Here are three areas where you should focus if you have shrink.

Front End Shortage – Guest and Customer Service 

Guest and Customer service is one of the biggest areas where shrink can occur. This can include your sales associates/cashiers registering a sale incorrectly by miscoding the products purchased;  giving their friend a buy one get one free, or even miscounting a customer purchase.  All of these instances create a discrepancy between your accounting records and the actual physical product on hand.

Back End Shortage – Inventory Management, Backroom Stock, and Correct Labeling

Backroom and Inventory Management is another common area for shrink. Companies should have strong controls and processes in place for accepting and receiving goods from their vendors.

Does your company create a purchase order and reconcile it to each shipment received?  Does your company inspect the goods purchased against the purchase order and invoice?  Does your company account for the invoice and the goods purchased in a timely manner? Does your receiving team store the inventory in a place that is restricted or secured?  Does your company have a naming and storage convention for your inventory?

If you can build strong protocols and processes around the inventory receiving and management functions, your company will have more control over inventory.  If any of these processes are not working or non-existent, the business from the initial purchase from the vendor can be susceptible to shrinkage.

Ineffective  Accounting 

You will not be able to identify areas where there is shrink in your Company if you don’t know your numbers or if your accounting is not accurate.

Bill Gates says, “Knowing your numbers is a fundamental precept of business.” I say, “knowing your numbers is essential in business.”

You will lose thousands of dollars in lost revenue and product if you do not have your a solid grasp of your numbers.  If this is something that you are experiencing, let’s set some time to talk. 

Next Steps to helping mitigate shrinkage

Most shrinkage is attributed to theft – either internal or external. This can include employee theft, vendor theft, and customer theft.   To help minimize your shrink, you will want to:

  1. An adequate training program for all staff that are handling inventory
  2. Policies and procedures to guide employees, vendors, and managers in purchasing, sales, and operations
  3. A fully functioning cost system that is used to value inventory and to determine product, customer, and facility profitability
  4. A threshold for inventory variances (tolerance)
  5. Corrective action plan to identify and resolve inventory variances
  6. Key performance indicators for the person(s) responsible for inventory-  this typically is an inventory manager, operations manager, or in some circumstances a general manager.

Inventory is one of the most valuable assets of any company. It is important that you take your inventory management seriously, and recognize that proper inventory management starts with effective leadership and employee training.