A major issue or problem that grows in businesses overtime is inefficient stock control and several businesses experience a financial downturn each year because of the poor stock control methods in place or no stock control procedures at all.
If a business applies an effective stock control system, it greatly adds to eliminate the financial strain that surrounds the business. Under-performing stock control systems will result in inappropriate stock (the wrong size /color etc.) available at the wrong location for customers. However, excess stock will result in needless strains on your cash flow and it is a well-known fact that lack of cash flows can end the most profitable businesses.
There are several stock control packages and not every package will suit a business. For example: a bagel shop will not need a computerized system to show the sales of 100 – 150 bagels where as a supermarket where thousands of stock lines are available for sale, a POS (point of sale) stock control system will be necessary.
The system you opt to use should be able to provide you with the required information at any time, like the stock-take of any given product or for the whole mart. At the point of preparation of interim or year-end management accounts, the accounts must reflect through profit and loss, the variations in stock.
If you have a practice of managing stock regularly, you will be able to identify the discrepancies in business; it will display any stock shortfalls resulting from customer or staff theft, it will also identify any item that is not selling the way you expected and price cuts need to be applied to make a sale. A stock control system will also identify any items that are moving out fast and they need to be restocked, showing the difference in the present & previous purchase price making it easier to understand whether you need to alter the price in your store.
Stock-takes are valued either at net realizable value or at cost price whichever is less. Preparing your stock-take gives you a choice from a number of methods and each method will display a different stock value to record in your financial statements. Whichever method you choose for stock control, that method must be used for future stock-takes as well, to provide consistency in records and will make the comparison and analysis of financial statements easier. The methods that are used include:
- I.F.O. (First in First Out)
The term “F.I.F.O” that means first in first out explains that your stock valuations will be based on the first items that are purchased and the first ones that are sold. Therefore, your inventory will be valued based on the recent merchant invoices.
- V.C.O. (Average Cost)
A.V.C.O stands for the weighted average cost of purchased stock and is a complex method of inventory valuation.
- I.F.O. (Last in First Out)
L.I.F.O means last in first out which explains the stock is valued using the concept that the last items purchased are sold first. Therefore, the inventory is valued using the oldest merchant invoices.
SK Financial provides advice for businesses on the inventory valuation method that will reflect their true position and how will it affect the cash flows.