If you’re in the business of buying and selling stock, but you don’t have an inventory management system (IMS) in place then you’re going to be experiencing a few headaches.
Selecting an Inventory Management System
If any of the above or any other issues resonate with you then it’s highly likely you need, or could at least benefit from some kind of inventory management system.
Inventory management can come in different forms and different systems depending greatly on the scale of your business and the industry you’re operating in.
If you’re in the retail space with perhaps just one or two stores, then you may very well manage with the inbuilt inventory management of your point of sale (POS). This is usually a simpler type of inventory management but may be all you need if you’re simply buying & selling finished goods.
Similarly, for those in hospitality you’ll likely want to utilise the inventory functionality of your POS.
If you’re in the trades (plumbing, electrical, etc) then you’ll want a system that can help you track stock across multiple locations (vans) as well as a central location (warehouse), and then can allocate and on charge those items on a job by job basis.
For those who are buying and distributing inventory in bulk, perhaps acting as a wholesaler, large online store or even building their inventory from raw materials; you’ll need the type of inventory management system I’m referring to here.
An IMS is designed to help your business control and track your inventory through its entire life cycle from purchase order through to receipt, production, storage and sale.
Features of a top Inventory Management System
A solid, well managed IMS will help you really get a grip of where your inventory is at. Some of the features of a good inventory management system include:
- Purchase orders; allow you to communicate with suppliers the stock you wish to order, as well as track on your end the stock you have on order from your suppliers.
- Sales tracking across multiple channels; easily integrate your IMS with your POS and online store so that stock is automatically depleted, and order status is managed easily.
- Drop shipping; allows you to sell products you don’t have in stock, but at the same time generated a purchase order for the stock required to fulfil the orders.
- Manufacturing; for those building items from raw materials, the ability to create bills of materials for your products will allow you to finally get an accurate value of your true cost of sales.
Now let’s talk about the impact on your financial information of implementing an IMS into your business.
If you don’t have a IMS..
If you don’t have an IMS in place – here’s the processes that your probably currently undertaking to get a relatively accurate profit & loss for a given period.
When you order stock (whether it’s finished goods or raw materials) the impact on your general ledger is:
The issue here is that you (likely) haven’t sold that inventory; it’s probably now in your warehouse waiting to be sold or turned into finished goods. To navigate this issue, you should make an end of period (month, quarter, year) adjustment to balance the amount of inventory you’re carrying on your balance sheet:
Whilst this is a reasonable work around it’s not ideal.
The process with an IMS..
Putting an IMS in place changes this accounting process.
When you purchase stock by receipting a purchase order in your IMS the impact on your accounting ledger is:
You can see from the above that purchasing inventory has no impact on your profit & loss at the time of purchase. Instead, it only affects your balance sheet.
The next part of the process is when you sell that inventory. As this process is also managed in your IMS and your IMS has an accurate value of what an item costs your business, there are effectively two journals processed in your accounting data:
Step One: recognising the sale.
Step Two: recognising the cost of the item sold, at the time of sale.
What this leaves you with is a live picture of your true financial position in terms of revenue, cost of goods sold and inventory on your balance sheet – which is what we all dream of – right?!
We can help
Finding the most suitable inventory management system can be a difficult task. If you need help choosing an effective inventory management system that suits your business and industry please contact ProAMS today.
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