All businesses need to maintain a particular volume of stock. These stocks are known as inventory. These stocks must be monitored so that nothing goes wrong before it’s sold.
This inventory control technique is crucial to business operations and reduces storage costs. It also helps companies avoid stockouts, which negatively impact customer satisfaction.
1. Inventory Management
Proper inventory management can save businesses money by ensuring they have the products in stock to meet customer demand without overstocking or running out. In addition, it can help ensure that inventory levels are accurate and that sales and profit targets are being met. It can be done in various ways, including conducting periodic or perpetual stock counts and using inventory tracking software to monitor ins and outs.
Planning, budgeting, and decision-making procedures can all be impacted by inaccurate data, which can lead to understocking or overstocking concerns for firms. Determining and putting in place a procedure for routinely verifying the correctness of inventory data, such as dealership accounting, is essential because of this.
Counting inventory regularly is vital for many types of business, but the frequency will vary according to the type and turnover rate of the product. Some companies prefer a physical counting method, which involves counting all items in a warehouse or store at specified intervals, such as once a year. Other businesses prefer to count their inventory using a cycle or perpetual counting approach, which combines the two methods and only requires physical counts at specific intervals.
Another factor to consider is the inventory valuation method, such as first-in, first-out (FIFO) or last-in, first-out (LIFO). While FIFO is preferred for perishable products, LIFO is often used for dealerships with new vehicle inventories, allowing them to defer income tax on their higher-cost inventory purchases.
2. Inventory Reordering
One of the most important aspects of inventory control is knowing when to reorder. There are many methods for calculating reorder points; the best one may vary by business and inventory situation. However, all methods should minimize ordering, storage, and carrying costs by optimizing inventories.
Too much inventory results in tying up capital, while too little inventory can result in stockouts. Stock shortages may discourage clients from making repeat purchases and force them to do business elsewhere. Developing and using an effective reorder point strategy helps avoid these issues by providing a buffer of safety stock for each product you sell.
Reorder point planning involves determining when it’s time to order replenishment inventory. Ideally, the process should be set up so that orders for replenishment arrive just as on-hand inventory is being used up. It ensures that production and fulfillment activities are not interrupted and that no wasted expense is associated with storing excess inventory.
An efficient reorder point plan should consider each product’s average daily usage rate, lead times, and safety stock levels. Including the cost of storing the inventory in the calculation can also be helpful. The amount of safety stock included in the calculation will be determined separately. Still, ensuring that this buffer can cover your expected usage rates and lead times is crucial.
3. Turnover of Inventory
Inventory turnover is a crucial business metric since it tracks how frequently a company sells and replaces its inventory for a year. It is a good indicator of effective warehouse management and sales strategies.
An increase in inventory turnover results in greater efficiency in the warehouse, as well as savings on storage costs. Additionally, it lowers the possibility of expensive errors and enables businesses to track stock movement. For example, if slow-moving products are not selling quickly, they may need to be liquidated or sold at a discount. Accurate forecasting and regular audits are also crucial for inventory control.
The first step in calculating inventory turnover is determining your cost of goods sold (COGS). This figure includes the price you paid for raw materials/components, shipping and handling costs, and holding expenses such as storage space rentals. Then, divide COGS by your average inventory. This method is preferable for accountants, as it uses the actual cost of your products rather than sales numbers.
Moreover, consider the company’s unique circumstances and business model when interpreting your inventory turnover ratio. For example, if you are in an industry that requires perishable items, you will likely have higher turnover rates than a business that carries durable goods. You can improve your inventory turnover by optimizing the amount of products you order based on demand forecasts and other variables.
4. Inventory Analysis
Inventory analysis is an essential step in improving dealership profitability. By analyzing inventory levels and comparing them to the company’s ordering system, managers can identify stockouts that cause customer frustration and slow down sales. They can also determine when to order new products and plan for future growth by knowing which items are selling well or poorly.
Performing regular physical inventory counts benefits your customers as well. Customers want to purchase the vehicle they want right away, and an accurate inventory count allows you to fulfill customer orders promptly or tell them when you can. Performing a physical inventory count also ensures that the company’s records are up to date and helps to save on storage costs.
To prepare for a physical inventory count, dealers should ensure that the stocking area is clean and that all necessary supplies are in place before starting the count. They should also freeze any other activities impacting the count, including receiving and adjusting inventory, until the counts are complete and reconciled. It’s a good idea to divide the counting team into groups that will handle the different areas of the stocking area. It will prevent one person from being responsible for the entire counting process and make it easier to catch any errors that may occur.
In conclusion, inventory control is crucial in dealership accounting for several reasons. It ensures accurate financial reporting, prevents theft and fraud, maximizes profitability, and improves customer satisfaction.
By implementing effective inventory control measures such as regular audits, automated tracking systems, and proper staff training, dealerships can streamline their operations and stay ahead of the competition.
The benefits of maintaining a well-managed inventory are undeniable and cannot be overlooked. Therefore, it is essential for dealerships to prioritize inventory control in order to achieve long-term success. Take the necessary steps today to strengthen your dealership’s accounting practices and reap the rewards in the years to come