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Taking Stock: A Study in Small Business Inventory Management

[fa icon="calendar"] Sep 25, 2015 9:43:52 AM / by Timm Funk

Timm Funk Associates is an executive-level CPA firm in Sioux City

For those of you who know us at Timm Funk Associates, you know we specialize in small to medium-sized businesses in the local Sioux City area, many of which manage large inventories. Of the number of inventory-based clients we serve, 80% have needed assistance tracking this critical component of their businesses.

This tells us two things:

  1. Entrepreneurs are often great at selling things.
  2. Entrepreneurs are often unaware of the complexities of small business inventory management.

Unfortunately, the disconnect between the two points is a large reason why Siouxland small businesses fail, despite having a great product or a superior sales force. Inventory is often the largest expense item on the company’s income statement, and must carry with it a healthy amount of respect for the complex system of stocking, ordering, lead-time, organization, tracking, and pricing. Failure to give this part of a business the proper attention can result in poor cash flow, theft, waste, unhappy customers, and misleading financial reports.

Such was the case with one of our clients, a distributor of pet supplies that was having significant fluctuations in inventory dollars on its books. It was early 2015, a time when most of the Midwest was in steady economic recovery and businesses were starting to pay more close attention to their own growth and potential. Close examination of their financial reports showed that their annual cost of goods was over $1,500,000, an impressive number, to be sure, but not quite as startling as the range of its variances, which went as high as 13% (that’s $200,000!) at times.

The company will have a Sioux City CPA firm audit its records for 2015. The inventory problem will have to be addressed in order for lenders to receive reliable financial statements.

This is where we came in.

Understanding that a reliable inventory management system is critical to a business success in terms of its cash flow and profitability, we knew that the only way to get a firm grip on the problem was to walk in on the ground floor and start understanding their current processes.

To that end, we worked side-by-side with the operations staff, asking questions about their best practices and the reasons behind them. We documented the flow of paperwork and the inventory it represented. We got a feel for the warehouse and storage layouts, the products within the space, the manufacturing process, and the nature of inventory variances.

Because we were approaching the problem with an unbiased eye and years of experience in small business inventory management, it didn’t take long to uncover the weaknesses in their system and to recommend changes to increase inventory control. We worked with them to implement a new inventory tracking system, and continue to monitor its progress to make sure it is not only effective, but also easy to maintain.

After two weeks of on-site work by our associate, the staff saw exactly how this customized system made their work less frustrating. They knew where products were, how to manage build assemblies, how to reconcile to accounting records, and how to take physical inventories. The general manager and owner now feel more confident in the control over this major cost area.

From software programs to smartphone apps, there are many inventory management tools on the market right now to help Siouxland small business owners solve inventory management problems. While effective, these tools are only as good as the information and organization systems currently in place. Sometimes there isn’t “an app for that.” Sometimes you need an experienced professional on the ground, rolling up sleeves alongside your team, and digging into the problem to find out what’s really going on. And that’s why we're more than a Sioux City CPA firm; Timm Funk Associates not only provides sound financial reporting, but also sound financial solutions to Siouxland small businesses.

Is your inventory management system everything you need it to be? Do you have questions on your financial reports that you can’t answer? Take our business assessment to check the health of your small business.

We’re here to help you succeed.

 

Download Business Assessment

 

Topics: Entrepreneurial

Timm Funk

Written by Timm Funk

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