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Why Are My Inventory Audits Always Incorrect?

Sound familiar? After finally getting around to their annual inventory audits, some businesses uncover major inaccuracies and are puzzled as to their cause. Conducting routine inventory audits using the right inventory management system ensures that items on a balance sheet actually exist and are owned by a company. They also evaluate the condition of the inventory, noting items that are damaged or obsolete. This enables auditors to truthfully determine items’ net realizable values so they can remove or replace inventory, correct their records, and precisely report profits. These are important ingredients to a company’s success.

Start at the beginning

Companies using manual inventory control systems—such as capturing information on paper using a pen and entering the data into an Excel spreadsheet—can unintentionally misrepresent their income due to human error. So can businesses with inventories that are difficult to establish, such as those with gas or oil reserves, those with values that vary according to demand, and those where quantities constantly change due to 24-7 operations. [caption id="attachment_6181" align="alignright" width="200"] Manual inventory control systems can unintentionally misrepresent a company's income due to human error. Automated inventory management systems prevent costly write-offs, eliminate theft, and avoid lost sales.[/caption] Without a reliable solution for auditing their inventories—including materials and supplies that are stored on or off site and those that are in transit—organizations can experience costly errors. Common ones include incorrect:

• Counts. When quantities are wrong, companies often have excessively high or low amounts of inventory, which leads to expensive overstocks and production or fulfillment delays.
• Units of measure. Valuation errors occur when employees count and enter quantities of individual products rather than units of measure.
• Standard costs. Standard costing systems contain an item’s usual cost in their master files. If nobody adjusts this price to reflect actual costs, then the amounts will be erroneous.
• Cycle adjustments. Active cycle counters can adjust accounting records after discovering inventory errors. Transaction delays can cause major problems if a correction has already been entered, but not posted.
• Part numbers. Double entries impact the bottom line by incorrectly accounting for parts. For example, a staff member may assume an item has a certain part number and will assign the inventory count to that number in the system. If the item has a different part number, then both the right and wrong part numbers will reflect inaccurate counts.

 Stop the bleeding

When inventory amounts are overinflated, the cost of goods sold is understated. So are profits. Likewise, if amounts are deflated, the cost of goods sold is understated, as are profits.  Because the ending inventory of one period becomes the beginning inventory for the following period, it’s important that organizations “get it right” from the beginning to avoid expensive mistakes. This means correcting common recordkeeping errors, such as those mentioned above, and identifying other areas of loss, including:

• Employee theft. An article in Inc. states that “The U.S. Chamber of Commerce estimates that employee theft costs American companies $20 billion to $40 billion a year.” They also report that “employees are 15 times more likely than a nonemployee to steal from an employer, adding, “Unfortunately 75% of employee-related crimes go unnoticed.”
• Inefficient processes. Operational inefficiencies can cost organizations as much as 20 to 30 percent of their yearly revenues. In fact, the difference between having 98 percent inventory accuracy versus 80 percent can translate into tens of thousands of lost dollars.
• Outdated technology. According to Xerox, when assembly lines stop in automotive manufacturing plants, companies can lose more than $20,000 for every minute of every day they are down.

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Take a turn in the right direction

It’s true that inventory audits can be plagued with errors. But, it is possible to present an accurate picture of a company’s worth. One way is to abandon manual methods for managing inventory and implement an automated technology system with the checks and balances organizations require. System ID offers a popular, cost-effective solution—Wasp Inventory Control—which works well for small-to-medium-sized businesses (SMBs) eager to:

• Prevent expensive end-of-year write-offs due to overages
• Eliminate employee theft
• Avoid lost sales and dissatisfied customers due to inaccurate inventory levels that can delay or stop production
• Stop wasting time and money searching for and replacing lost or missing inventory due to inefficient processes

Wasp Inventory Control software tackles these challenges and more, thanks to robust features that fit a majority of businesses. These include the ability to:

• Achieve 100 percent accuracy when using a mobile computer to perform inventory audits
• Quickly check items in and out and be proactively notified when items are overdue or require maintenance
• Manage inventory at multiple locations and move it from one site to another
• Track inventory costs using LIFO, FIFO, or Moving Average valuation methods
• View, adjust, and remove count levels, including total available, checked out, in stock, on order, and committed
• Securely control access to information, which is instantly available to users with certain permissions

Wasp Product Marketing Manager Paul Trujillo describes how Racesource Inc., a respected custom manufacturer of vehicle components for the racing industry, saved $8,000 in excess purchases and 52 hours tracking inventory its first year using Wasp Inventory Control. “Racesource was growing, due to their reputation for manufacturing high-quality vehicle parts. Their existing inventory method was an Excel spreadsheet, which couldn’t keep up with demand. The company started incurring additional expenses because they kept reordering and manufacturing unnecessary parts. They needed a way to track assemblies and individual items using existing UPC codes.” After thorough research, the family-owned, yet nationally recognized, manufacturer purchased and installed Wasp Inventory Control.  “Now, Racesource has a numbering system that corresponds to an accompanying barcode on every part. Not only does this ensure accurate identification and tracking, it has greatly improved their billing, manufacturing, and reordering processes,” Trujillo explains. Racesource Vice President Paul Huffaker supports these claims. “We saw results from implementing Wasp’s IC on the first day of use. I highly recommend Wasp’s solutions to anyone who is responsible for inventory control.” Looking for results like Racesource’s? Try:

• Conducting random cycle counts each month. Checking in unannounced enables companies to correct current counts and uncover process flaws that may be easily remedied.
• Executing routine quarterly audits. Don’t wait until year-end to discover inaccuracies. Planned quarterly audits can reveal small issues before they become big headaches.
• Contacting System ID. Whether you are a manufacturer like Racesource, healthcare provider, retail establishment, or even a warehouse manager, System ID can recommend the right inventory control system based on your unique requirements. Give our advisors a call at 888.648.4452, or schedule an online demo of Wasp Inventory Control.