Tuesday, May 20, 2014

Taking Inventory

I rarely come up against more differing opinions regarding accounting practices than when I talk about inventory.

Just yesterday I met with a prospective client who purchases parts which are drop-shipped and assembled at a manufacturer. Not a crazy idea. A smart financial choice it would seem. If I were to look at the books for this company, though I wouldn't actually see any of this activity. Why? All the inventory related activity is done outside of Quickbooks.

To use an ERM system or any kind of a external database for working with your inventory may be a sound decision for some businesses. Nevertheless, one should be able to look at your Profit and Loss Balance Sheet and see where your inventory assets are at any moment in time. Are they in transit to your warehouse? Are they paid for in advance but won't ship for two months? You may be able to tell me the answer to these questions by looking at your external database. What happens though if 3 years from now you are looking for financing or a buyer is doing due diligence. They want to see the past 5 years of activity. How much money did you have tied up in inventory at any one point? Pretty much any of the information they are going to be looking for is not going to be showing up in your financial reports.

The main reason companies can end up in this bind is because they build a system that is operation oriented instead of financially oriented. It is in fact possible to build a system that satisfies both needs but only if an accounting professional is part of conversation from the start. I've spent a lot of time trying to pull financial information out of a database that was built to track customer activity or shipping of inventory. It's all well and good that the folks on the operations side of things get to keep doing things in a way that makes sense to them, but at what cost?

Quickbooks is a very robust software. Add on some apps, some software designed to integrate like Salesforce or Wasp Inventory and it's stellar. It's simply not necessary to give up accurate financial reporting to gain operating ease. When operations and accounting are talking, it's a beautiful thing.

Drop by again as I further unravel some of the issues that concern today's small business. Thanks for reading and feel free to email me with any topics you'd like covered in future posts.