Each company is a team. So, all the players need to know their role and understand the role of the other teammates in order to accomplish their common goals. Many times the Accounting Department and the Parts Department are focused on different things in achieving the common goal of inventory reconciliation. Accounting is focused on the accuracy of their records for paying invoices, while Parts is concerned with selling to the customer.
By having a more thorough understanding of each department’s responsibilities there is less conflict and more fluidity in the way your organization works as a whole. Hopefully the tips below will spark conversation at your company.
1. Backorder versus Sell Negative Quantities
Typically, your system uses the cost of the part at the time it was placed on a ticket. Therefore, as you are force filling parts or selling to a negative ,the cost may or may not be correct since the purchase order has not been received. In our experience, some customers have chosen not to use a backorder process because they thought forcing parts to a negative was a better method. They later found out that when the purchase order was received the cost had changed. This created an inventory discrepancy.
2. Perform Cycle Counting
Counting small parts of your inventory on a regular basis just makes sense. It makes bin counts more accurate, keeps the warehouse more organized, and can be done without fully closing operations. Setting up a formal process will also help you reduce theft. If feasible, have different parts personnel handling each of these steps in the process: Receiving, Selling and Cycle Counting. The division of duties creates a system of checks-and balances that builds in honesty.
3. Adjust Journal Entries After Price Updates or Cycle Counts
Only replacement costing users need to adjust the general ledger for price updates. However, everyone needs to adjust for cycle counts, physical inventory counts, and shelf adjustments found in daily picks. If you perform cycle counts regularly to keep the physical inventory accurate, you should do the same with the general ledger. This practice is often over looked or avoided because year-end adjustments are inevitable. In order to have an accurate monthly P&L, the expense should be distributed in the month that it occurred. Timely adjustments allow for ongoing updates to company policies and procedures as situations change and they are needed.
4. Enter Variances at AP posting
It is easier to account for small variances at the time of invoice entry than it is to research and correct those at the time of reconciliation. This process will allow you to only have to research large or unusual items. You should take the time to establish clear guidelines for the Accounts Payable clerk on what is and is not an acceptable variance in cost and how to post this correctly.
5. Perform Monthly Reconciliation
While performing a monthly reconciliation takes dedication and time, it is more productive than waiting until year-end. It will allow you to pinpoint problems and process improvement areas sooner, and is a system check that will reduce potential employee dishonesty. It will also prevent you from finding a large variance at the end of the year that could take up lots of time to research and correct. Common practice is to reconcile bank statement and other asset accounts monthly. Since inventory is likely your largest asset, it should be treated with the same urgency.
6. Control Local Purchases
Each company has the need to purchase parts outside of a regular stock order. How those parts are handled can often make a huge impact on the bottom line. Since these parts are often not received into physical inventory, standard operating procedures (SOPs) should be put into place to make sure that the part is handled appropriately. Some things to consider as you set up these SOPs for sales, returns and core returns:
- How will the sale to the customer be handled?
- How will the price mark-up be handled?
- How will the Accounts Payable Clerk know what the cost should be?
- How will the part be costed to the customer properly?
- How will the part be recorded?