The Ins and Outs of Inventory Data Management

As a bookkeeping firm, we spent January completing financial statements for our clients. Because we strive for accuracy all year long, the year-end isn't much different than month-end except it's critically important that we have inventory right because of tax implications. And guess what, there are always challenges!

If you struggled with getting your inventory right for this year-end or if inventory is mysterious to you, let's dive into some of the steps you can take now to get a handle on your inventory data. After all, if you don't know your inventory and its relationship to cost of goods sold (COGS), then you are guessing at your profitability. Here are a few best practices for better inventory data management.

How to Stay on Top of Inventory Data Management

I recall a chat with my accountant friend Michelle. I was explaining how much trouble some of our newer clients had with inventory management. She laughed and said in her practice she knew where to find the answers to all the inventory questions. I leaned in, ready for this nugget. She said all the answers are written on the ceiling of her office. What? She explained, “Whenever I ask clients a question about their inventory, they look at the ceiling and give me an answer.” Oh, she had no gold nugget either, just a great anecdote.

To improve your inventory data management, we recommend recording COGS every month based on the products sold. This will capture most of your activity correctly. We also recommend that you true up to an actual inventory value each quarter. In non-accounting terms, this basically means you must reconcile your balances. If you complete a count of your inventory at the end of each quarter and apply the same product value that you use to value your COGS, then any discrepancy you find needs to be a true-up adjustment to Inventory and COGS each quarter.

Why Is Your Entry Off?

There are many reasons the straight COGS entry can be off, such as lost, damaged, or stolen products. You may also have products that you have prepaid out of Inventory and not yet received the goods. You could have terms with your vendor and have received product that you have not paid for.

Related reading: Tips for Monitoring Your Total Inventory Value

As your business gets more complicated, you will want to understand all these moving parts to ensure the accuracy of your financial records. It is disheartening to work all year thinking your profitability is at one level, only to do a year-end inventory adjustment and wipe it all off the books. Or, the better situation of writing up your inventory and reducing your COGS to show you have much more profit than expected, which comes with a tax burden you haven’t prepared for.

eComEngine's RestockPro software can also give you greater visibility into your profitability at the product level. Download the tool's SKU Profitability Report to see a list of your SKUs with their sales, estimated profitability, and purchase history for any designated time period. It's that simple - and seriously helpful.

Six Ways to Get Good Inventory Data

Getting good inventory practices in place will give you good inventory data all year when you're making operational decisions. The added benefit is that tax time is a breeze, it's just like every quarter-end. I know you're ready to dive in, so we've created a guide that will help you understand these six common concerns about inventory data management:

1. How inventory works on the Balance Sheet and the P&L
2. What needs to be included in unit cost calculations
3. What should be expensed directly to the P&L
4. Best practices for tracking inventory on a spreadsheet
5. Considerations for using an inventory software tool
6. Advanced inventory issues

Download the Inventory Basics guide and get started. Your ability to grow your profits and your business depends on you managing your inventory with skill and confidence.