Inventory is often a large expense for retailers, manufacturers, and other firms with inventory-based operations. Inventory analysis allows a company’s management team to discover flaws in the system and improve operations. Different aspects exist to this process. Owners and executives should review the inventory accounting system, internal controls, and physical flow of goods. Inventory analysis may also require a long-term employee who constantly reviews the inventory process in order to maintain proper procedures.
Two types of inventory accounting systems are present in business: perpetual and periodic. An inventory analysis can help a company determine which one to use and whether or not the current system works properly. The perpetual system makes updates to the company’s general ledger for each sale, purchase, or adjustment of inventory items. The periodic system only updates the inventory account at month end. A physical inventory count is necessary for both systems, albeit fewer times for the perpetual system.
During the inventory analysis, a company should review its production process to determine which system to use. Single batch processes or individual goods produced one at a time often fall under the perpetual system. Frequent updates to the inventory account help track financial data. Companies producing large sets of homogeneous goods typically use the periodic system. Less frequent updates work well because the types of goods produced are typically the same.
Internal controls are the protective measures a company puts into place for protecting inventory. These include prenumbered purchase orders, secure physical locations to store inventory, and security systems or cameras to watch inventory in the business. Hiring bonded employees and separating inventory duties among employees are also internal controls. The inventory analysis identifies if current internal controls are working properly and what internal controls are necessary to further protect inventory. Internal controls are often different among companies as they use ones specific to their operations.
The physical flow of inventory is another aspect of inventory analysis. This involves reviewing inventory operations from start to finish. Ordering, receiving, stocking, and selling inventory practices all need reviewing in order to determine how well they work. This process also works well with identifying internal control problems. Updates to how employees complete each task in the inventory process can help a company secure this asset.
Inventory analysis should not necessarily be an infrequent process in a business. Companies should actively review and update inventory procedures often to ensure no fraud or embezzlement exists in the company’s practices. Setting a specific schedule for inventory analysis also ensures proper completion of tasks by employees.
