3 Common Problems Affecting Product-based Businesses

Effective inventory management requires reducing errors that frequently occur. These errors involving inventory can impact the business significantly. On average, inventory represents approximately 15% of total firm assets. Add the high inventory carrying costs (which can be over 40% of a company's average inventory investment), and it's clear why maintaining inventory consistency is amongst companies' top priorities.

Managing optimum inventory requires strategic planning, experience, and consistent controls to spot the problems before they evolve into chronic issues. And, while there are more ways to identify inventory errors than ever, mistakes are common and can go unnoticed depending on the quality of your processes, controls and technology. 

Halkin's Technology team has worked with several companies to improve supply chain processes, technology and inventory management. From our experience, below are some of the most common issues creating problems for product-based businesses with inventory operations:

Red flag #1: Stock on hand mismatch

Inconsistencies are noticed when the quantity or value of the stock on hand is different from the records in your inventory management or accounting systems. This can be perceived during stocktake or if you're constantly experiencing stockouts even when your systems say otherwise.

The causes for stock mismatch include manual processes, lack of training, poor controls/systems, unexpected growth without appropriate management structures, or worse, all of the above.

The negative impacts can be understated/overstated inventory and many others, such as:

·       Discrepancies between inventory and accounting management systems.

·       Misalignment between sales and cost-of-goods-sold.

·       Unnecessary purchases and build-up of stock items.

·       Unable to spot and control problems such as fraud, theft, faulty stock and others.

And that's just the beginning. Besides affecting the company's operation and bottom line, these issues damage customer trust and create a stressful environment for the team.

Red flag #2: Frequent inventory adjustments

Unless you work with goods that expire in a short period, frequently adjusting your inventory count can indicate problems. Additionally, the impact is even more significant if several inventory adjustments are not completed or not correctly transferred to the accounting system. 

If you have to adjust your inventory frequently, the reasons may include:

·       Inconsistencies in your stock on hand (above).

·       Poor controls and technology infrastructure.

·       Incorrect handling, which can lead to missing material, too much product, or product that has become damaged or outdated.

Most of these can be prevented. Inventory adjustments cost time and money for your small business. The best way to solve the problem is to prevent it from happening in the first place.

Red flag #3: Misaligned sales and costs of goods sold (COGS, or erratic Gross Profit margin

This can be a consequence of the red flags above but can also indicate inventory inconsistency. Despite fluctuations in demand, businesses using a perpetual inventory system should expect sales and COGS to be aligned and accurately reflect the company's performance.

If you notice unusual variation between your sales revenue, COGS and inventory, the reasons may include:

·       Incomplete/incorrect dispatch process (orders not moving quantities or dollar amounts in your system).

·       Incorrect billing (orders not invoiced and/or not imported to the accounting system).

·       Incorrect stocktake, inventory adjustments.

·       Credit notes not imported (problems in the returns/refunds/exchange processes).

·       Lack of training, technology, or controls, allowing errors to go unnoticed for a long time.

Whenever items are received or dispatched from your stock, there must be a complete process in your inventory and accounting systems to ensure quantities and dollar value have been updated. Anything different can create problems such as inconsistent financial statements, working capital, incorrect stock on hand, negative impacts in auditing processes and statutory obligations, such as tax reports.

How can halkinbp help?

Although the causes can involve many factors, the potential solutions often will solve more than one of the red flags simultaneously:

·       Process Automations, reducing the likelihood of human errors and maximising your team's potential.

·       Technology implementation, ensuring the business foundations are solid and ready for growth.

·       System integration, reducing manual and incomplete processes.

·       Controls such as the Cin7 Health Check to help find and eliminate errors as soon as they occur. 

Halkin can help you find the best solution to automate your inventory management, avoid inconsistencies and achieve data integrity in your business. We can walk you through the best cloud-based solutions in the market that will enhance consistency, transparency, scalability and help eliminate the root causes instead of only the symptoms. 

The Halkin Technology team is ready to take your business to the next level; contact us to learn more.