Whether you run a small or a large business, one thing is certain: every year your accountant asks you for the inventory of the past financial year.
When do you have inventory?
You have inventory when you buy products (raw materials, consumables, trade goods) with the intention of selling them on, or using them for production or delivery. Goods already in use also count as inventory. Inventory is therefore the collective name for these products.
Your accountant needs the inventory at the year-end date. For sole traders this is always 31/12. For companies the year-end date is stated in the articles of association.
Why do you have to keep track of inventory?
The company's result must always be representative. That is really the reason inventory management matters so much. Here is an example:
During the year you buy enough products, often too many out of caution, to meet your customers' demand. The extra products are recorded as expenses in the year of purchase but are not sold. These products belong to the inventory. That is why an inventory adjustment is made in the books so that they are not treated as expenses. This is called an inventory increase. Expenses go down and the result goes up.
The following year you may sell more products than you buy, which is perfectly possible since there was inventory the year before. This is called an inventory decrease.
These two adjustments make sure the result is shown correctly.
How do you best keep track of it?
Now that the importance of well-managed inventory is clear, you may wonder how best to keep track of it. As an entrepreneur you are required to draw up and keep a detailed overview every year. Fortunately there are plenty of tools for this. Brincr and Lightspeed are perhaps the best known, but our old friend Excel can also do the job. Not sure how to go about it? Here is a small example.
At the year-end date (31/12) company ABC still has the following products in stock, with their value:
- Product X: 4 units x €5.00 = €20.00
- Product Y: 2 units x €15.00 = €30.00
- Product Z: 10 units x €0.50 = €5.00
- Total inventory: €55.00
Please note: inventory is always recorded excluding VAT and at purchase price.
Conclusion
Whichever way you look at it, inventory management has to be done. Not only to keep the books in order, but also to get a clear picture of what comes in and what goes out. That way you can make decisions that keep your business healthy.
Do you have questions about the inventory in your business?
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