The Importance of Internal Control Over Stock

Stockbyte/Stockbyte/Getty Images

Inventory control should be front of mind for anyone in the retail or wholesale distribution business. Fundamentally, it involves knowing what you have on the shelves and in the warehouse, when new inventory is coming in and when current inventory is likely to go out through sales. Controlling your stock can help lower storage costs, speed up order fulfillment and prevent fraud.

Controlling Inventory Costs

Every business wants to have inventory on the shelves at the exact time that customers want to buy it. Keeping the right balance of stock is an obvious reason to control your inventory levels. But it's also important to avoid overstocking as this takes up space in your warehouse and could push up storage costs.

There's also the risk that products will become obsolete or perish before you can sell them if you maintain excess product and/or you don't have a handle on expiration dates. Too much inventory can lead to profit losses – when a product goes out of season, for example, you may have no choice but to dispose of it or hold a fire sale which cuts into your profit margins. Understanding what customers need and when is key to proper inventory control.

Speed Up Order Fulfillment

Good inventory control helps you provide better customer service. If you're constantly experiencing inventory issues – frequent back orders, for example – then you can expect your customers to turn to other suppliers to meet their needs.

Good inventory control can give you a real-time understanding of what's selling and what is not so you can manage quantities in the warehouse in conjunction with lead times and customer demands. Many businesses use a stock control method called minimum stock, which ensures that new stock is ordered once it reaches a predetermined minimum level. If your sales are predictable (you're not a seasonal business, for instance), you can use a fixed-quantity control system to keep orders flowing smoothly in and out of the business.

Laying Down Tracks

Businesses that have good internal controls over stock generally develop a system that tracks the status of orders, logs the movement and location of items and (where applicable) monitors the various stages of production, order fulfillment and shipping. This lets you see what the inventory count is for an item at any point in time.

Tagging all the inventory items in this way is an essential part of financial reporting. A good system will tell you exactly how much inventory is on hand on a specific day so that the year-end balance sheet reflects the correct quantities. Besides complying with accounting rules, internal controls over stock can help improve operational efficiency by improving the timeliness and accuracy of your financial reporting.

Unusual findings, such as differences between the amount of inventory your control system thinks you have versus a physical count, suggest fraud, theft or other errors – you'll want to investigate these issues quickly before they throw your accounting and inventory re-ordering systems out of whack.

Internal Control Over Stock Methods

There are many ways to control inventory, but today, most companies rely on software systems of some sort. Off-the-peg inventory management systems provide an affordable way to cover all the bases, and usually allow you to track inventory levels, set automatic reorder points, transfer items between different locations, create sales and purchase orders and integrate with your accounting software for accurate financial reporting. Many use smartphone-based bar code scanning or radio frequency identification to speed up your picking and packing.

Controlling stock does not have to be complex, however. Organizations with a small inventory of items could manage their stock with a simple spreadsheet, as long as staff deduct what they sell and ship and reconcile the spreadsheet to the general ledger.

References

Resources

About the Author

Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com. Find her at www.whiterosecopywriting.com.

Photo Credits

  • Stockbyte/Stockbyte/Getty Images