Stock - tracked & untracked methods explained
In a product business, as you start buying and holding stock, you need to consider how you will keep track of this and how to incorporate stock movements into your accounting system.
Why do you need to do this?
In your accounts there is a difference between costs and assets;
A cost is probably self explanatory and can be very varied – rent, software costs, postage costs, insurance, wages/ salaries.
An asset is something that you have bought for your business but it’s different from a cost because it is something physical that you own that will generate you money – like stock (you can sell it to make you money) or equipment (you can use the equipment to make or customise products to sell).
But if you are a product business there can be bit of a grey area between costs and assets.
If you buy complete products and then sell them on, then the products you buy are assets. But if you make your own products, do you classify the costs of all the individual materials you buy as costs or as assets?
There is no ‘right answer’ to this question, it depends on your business, your products, your accounting process, your time, your resources, your priorities…!
How to capture stock in your accounting system
If you did not account for any stock in your financial accounts, then all the costs of buying or making your products would be classed as a cost, this means your business costs would be higher and your business profits would be lower.
So by recognising the difference between costs and assets your costs will be lower and your business profit will be higher.
Fundamentally there are two different options to use when capturing the value of your stock as an asset:
These options are not set in stone, like many business processes you may pick one in the early days of your business and then switch methods as volume increases.
The tracked stock method is more accurate but sometimes the admin burden of using it could outweigh the benefits, especially in the early days if you don’t have large volumes of stock and sales.
To administer a tracked system, your products would need to be set up as separate stock items on your stock management system and in your accounting system and then every time you purchase an item or sell an item the movement would need to be registered. There are many different ways to help you track these movements, like using barcodes and scanning items every time you buy or sell items. There are also many apps that integrate with accounting systems to help with tracked stock management. Also some product businesses use fulfilment partners, so they will probably already have a stock management system in place which could possibly be integrated with your own accounting system, or if not, they would probably be able to provide you with regular updated on stock balances and movements.
By having up to date and accurate stock figures this means that the profit figure in your accounts is much more accurate and you’ll have a more accurate view of your business for making decision around sales, promotions, discounting, wholesale orders etc…
Untracked stock is less accurate but also has much less admin involved. Purchases of stock or materials get posted as a stock asset as and when you buy them. But the asset values of the stock holding but do not get reduced down as sales are made so your costs are not completely accurate.
The logic behind using untracked stock is that you would then do a stock count 2 or 3 times a year, or better still monthly, and then you would adjust the stock figures in your accounting system to reflect how much stock you actually have. So the profit shown in your accounting system would not be accurate until you do a stock count.
Do you need to do stock counts if you have a tracked stock system?
Even with a good stock management system in place, errors can still occur so I would still recommend you do stock counts. It is completely normal for there to be discrepancies between what your stock system says and what you actually have and there should be the functionality in your accounting system to make adjustments for stock count results.
I would definitely recommend doing a stock count on or near your financial year end date, so that your company year end accounts will be as accurate as possible. Ideally half way through your financial might also be another good point to do a count.
Or if you have been through a busy period of high volume sales and feel that things may have got a bit messy it can be useful to do a stock count if you have the time to do so – I’m sure it’s no coincidence that I’m writing this blog in January, this topic was on my mind as it feels like a good point to pause and take stock, literally!
I hope that has helped de-mystify stock tracking methods, and if you would like to discuss stock management feel free to get in touch.