Inventory management is an area of concern for many of our clients as they are transitioning from the research and development stage to operations with sales. An effective inventory management process will allow a company to accurately track the costs associated with each sale, so that management is able to calculate the gross profit and make effective decisions about future pricing and ordering. When designing an inventory management process, there are several key needs our clients require beyond just tracking the item type and price. An example is the expiration date for medical devices which is something that may not jump to mind when looking at an inventory process but can be essential data for management to track; same thing for lot tracking or serialization.
Inventory tracking starts in the purchasing process, flows through the inventory accounts, and is released during the sales process. It is important to see these three processes as part of the same overall process instead of viewing them in a vacuum. The three processes are outlined below:
- When an item is purchased, that item is recorded in inventory at the correct cost, expiration date, and with any other data that is deemed important by management. The method of inventory cost tracking can be applied here, so that items are tracked using First in First out (FIFO), average cost, or Last in First out (LIFO).
- At this point, any kitting that is needed will be completed, so that the item is ready to be sold and the inventory reports reflect the correct counts and cost for the items available.
- As sales are made, they will reduce the number items (either individual items or kits) in inventory and record the cost of the sale that has been made, along with the revenue for each sale.
If inventory management is not thought of in this type of process, then everything would be manual steps: reclassifying expenses into inventory for items purchased, making entries for the cost of sales when an item is sold, and manual calculation of item costs as they are recognized as cost of sales. This can easily become overwhelming to a company and will most likely produce results that are not accurate and not allow management to make effective decisions.
SC&H has found that using a modern day accounting system like Sage Intacct to track inventory allows a company to obtain all the relevant information noted above, without having to make manual entries for each step. Below is an example how a modern accounting solution can streamline the purchasing, accounting for, and sale of inventory:
- Multiple workflows can be set up in the purchasing process to allow for the proper approvals all the way from the purchase requisition through the invoice payment.
- Items are set up in the system so that the person entering the purchase information just needs to select the correct item and enter the quantity and unit cost of the purchase. This will automatically update the cost and quantity in the inventory ledger at the time of posting (when the items are received).
- The sales process can also be set up with approvals and a customized workflows all the way from the sales order to the receipt of payment from the customer. The person entering the sales order or sales invoice would select the item or kit that will be sold, enter the quantity and sales price, and the system can post the cost of sales portion of the transaction and remove the correct quantity from inventory.
When the inventory processes is configured properly, management will be able to see the correct cost of sales and gross profit. Real-time inventory reports can be run, showing the items, count, cost, profit margin, expiration date, lot number, etc., giving management a full picture and enabling them to make accurate and effective business decisions that would not be possible without this information.
Feel free to reach out to us with any inventory questions. And in the meantime, check out our latest on-demand webinar on “Revolutionizing Management Reporting with Sage Intacct.”