Segmenting inventory on the balance sheet for better inventory management (using Xero and Quote Stock Sell)
I remember well how frustrating it was to look at my inventory figure on the balance sheet and wonder exactly what the inventory was composed of, and I don’t mean physical products but the status of those products. Inventory in a busy business is very dynamic. There is always stock at different stages of passing through your business, stock coming in that you have an invoice for but the stock hasn’t yet arrived, faulty goods waiting to be returned to suppliers, faulty goods coming back from customers and sometimes inventory that you have shipped to a client but maybe haven’t invoiced to them yet. Then compound that issue over several warehouses and you get an idea of how challenging this inventory management scenario can be for a manager, especially in a small to medium-sized business when cash flow counts and having an inventory full of faulty goods and pending supplier credits can really start to cause an issue. Sorting out inventory issues can be a very time-consuming problem if you let it – so why not try and minimise the opportunity for your inventory to get out of hand? With Quote Stock Sell linked to your Xero accounting system you can track your inventory within Xero in more detail, so as a manager you can review your inventory status within Xero without having to login to Quote Stock Sell. At a glance, you can see your faulty goods, inventory in transit and inventory that you have returned to your supplier but have not yet seen the credit notes for.
Another reason to segment out your inventory is to assist with your true financial position at the end of each month or quarter when you want to review how your profit actually looked. If your business sometimes sends an invoice out in advance of sending goods, in order to get payment from a new customer for example, your gross profit from sales could be inflated as you are missing the related cost of goods sold making you appear more profitable than you really are in that time period. Similarly if you send goods out to your client but haven’t invoiced them because you are awaiting the completion of another component of that sale or project before you close the invoice then your cost of goods sold could be inflated in comparison to your sales (as your corresponding sales entry is not there) making you look less profitable than you really are. By segmenting your inventory you can see at a glance what these sales and inventory figures are that could distort your true profit position.
How good are you at organising your supplier returns of faulty goods, or rather how good is your staff member that is responsible for returning those faulty goods? Can you look at your balance sheet and see instantly that the “Faulty inventory” category doesn’t appear on the balance sheet because it is sitting at $0.00 indicating all goods have been returned? If you can instantly see that there is $44715.77 of faulty inventory in your balance sheet (see the example balance sheet segment above) as a result of your normal business processes through your sales and inventory system (without you needing to do manual counts or journals) and is in real time, then you can immediately take action to resolve that situation. Sure many systems can run reports to identify your faulty inventory – but how often do you run those reports in comparison to reviewing your balance sheet?
If you would like to learn more about segmenting your inventory by using Quote Stock Sell and Xero please get in touch with us at firstname.lastname@example.org or contact your accountant, book keeper or business advisor and feel free to refer them to us if they would like more detailed information.
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