What is the Story? As a business owner, keeping an accurate inventory will help you in several ways. By having this accurate and timely information, you are better equipped to recognize and react to cost fluctuations. Inventory will aide identifying waste and theft. And, adding your inventory to your financial statements will give a more precise financial picture of your business.
Defining Inventory: Inventory refers to both how many goods you have ready for sale and the parts or pieces available to make more. For example, if a cupcake bakery makes flavors in large batches and freezes some to use later in the week (instead of baking 24 flavors each morning). Those cupcakes in the freezer are part of inventory and so are the remaining raw materials such as bags of flour, sugar, and eggs that are in the dry storage and cooler. To have an accurate COGS, we would want to include three stages of our product: finished products, work-in-progress (meaning started but not finished), and raw materials.
Picking an Inventory Method: How often do your prices fluctuate? If you sell t-shirts, the price per shirt may increase $1 (from $7 to $8) during the month. The most accurate method in this situation is to set the old $7 shirts aside to sell first and create a new inventory item for the new $8 shirt. Here the first shirts you received would be the first ones you sell, and the cost would follow the product through production and the final sale. This is also known as the First-In-First-Out or FIFO Inventory method.
If we go back to looking at flour in the bakery, you may not have the ability, space, or incentive to separate multiple bags of flour in the stockroom. Tracking and maintaining your inventory will take time, but it should not impede the efficiency of the production process. In this floury situation, we would update our inventory cost to the final amount paid for the product during the period. In our recent purchases we bought 3 bags of flour for the following prices: $22.15 on day 1; $23.10 on day 3; and $22.60 on day 6. On our ending inventory, we would count all the remaining flour at $22.60 per bag only looking at the last price paid. This inventory method is known as Last-In-First-Out or LIFO.
How Often Should You Count: It takes a pretty sophisticated system to maintain a real-time perpetual inventory. For most small businesses, that would be an onerous expense and not proportional to the value of information gained. For many, inventories that are counted weekly give the best, timely information in a balanced cost-effective way. Because the period is so short, unusual fluctuations will stand out. Being able to identify these changes will help to identify and reduce waste, spoilage, and theft.
Depending on the other needs of your business, weekly inventories may feel too burdensome or time-consuming. If you do feel this way, then schedule your inventories to occur at least monthly. As I stated, the shorter the period, the easier it is to see fluctuations. To use the proverbial box of steaks that eventually goes missing in every restaurant, that $250 drop in beef will be unavoidably obvious within the bounds of one week. It may be identifiable in a month but will likely average out to seeming like beef prices are just higher than usual (and beef prices are always increasing for restaurants). But in the bounds of a 6-month or yearly inventory, those steaks will not even be a blip. Except, of course if they have gone missing several times over, but then it will be too late to recover that loss.
How Do I Take Inventory? Perhaps this question should have led, but I saved the best for last. I’ve included a free inventory worksheet template below. Some common ways to group items is by location in the business, by vendor, or by type of item. The best way for you will depend on the needs of your business. Very important though, you always want to count items in the stock and mark on the sheet. If you use the inventory to find and count the item, it is more likely that you will miss an item completely. Each period, you may have new items to add and include and occasionally remove some discontinued items.
Be sure to pay special attention to the unit count and the price per unit. If flour comes in 50 lb. bags, will you count by bag or by pound? Pricing by the pound but counting by the bag will surely throw your value way off.
Here is what to do with each of the columns in the attached document:
- Column1 QTY: fill in the number of units for each item
- Column2 Item Name: This is just the name of the item, but it can also include the model number or vendor if that information is helpful
- Column3 Unit of Measure: This is just a reminder of how to count the item. Is it by bags or pounds, cases or units, boxes or weight?
- Column4 Price Per Unit: This is the dollar value of the unit you will be counting
- Column5 Value on Hand: this is a formula that multiplies the quantity by the unit price
- Total Inventory: This is a sum at the bottom of Column5 that adds the value of all items/lines
A great time-saver is to use a tablet to make the actual count. This eliminates the need to copy from paper to a computer and allows you to permanently add new items right there.
I hope I’ve shared some compelling reasons to maintain an accurate inventory and that the attached resource will be helpful. Please let me know how it goes including any new insights you discover or any issues you find in the process.