There are a myriad of problems that arise from inaccurate inventory in business, one of which is the dreaded write-off. The long and short of it is that no one wants to be in a position to inform a boss that some $50K+ worth of inventory has just been written off – for any reason. Perhaps even more frightening is the fact that the true cost of inaccurate inventory is much larger than that.
With this situation comes additional costs that businesses often incur when they don’t deal with inaccurate inventory problems, and one of the most significant of them is purchasing/working capital. Before we delve into the specifics of how this affects inaccurate inventory, let’s take a quick look at the definition of “working capital.”
Working Capital: What is It?
Working capital refers to the amount of a company’s current assets minus the amount of its current liabilities; for example: If a company’s balance sheet dated June 30th reports total current assets of $323,000 and total current liabilities of $310,000, the company’s working capital on June 30 was $13,000. Similarly, if another company boasts total current assets of $210,000 and total current liabilities of $60,000, its working capital equates to $150,000.
The adequacy of a company’s working capital depends on the industry in which it competes, its relationship with its customers and suppliers and more, including:
- The types of current assets and how quickly they can be converted to cash
- The nature of the company’s sales and how customers pay
- The existence of an approved credit line and no borrowing
- How accounting principles are applied
Purchasing/Working Capital as an Inventory Concern
There are business strategies to optimize inventory but almost all of these require that inventory is accurately tracked. In the realm of inaccurate inventory, working capital refers to funds that are tied up when inventory sitting on a shelf in the warehouse isn’t moving. Over-stocking is one reason inventory doesn’t move.
A big reason companies overstock is to compensate for inaccurate inventory counts. Companies don’t want to be caught unable to manufacture parts or ship goods to customers because their system says they have stock but, in reality, they don’t.
Inefficient inventory management can ruin a business, and while inventory management can be a tedious task for some, using a streamlined process – preferably one with a reliable tool – can greatly reduce mistakes and improve operations, which can lead to more sales.
Optimizing Working Capital with Better Inventory Tracking
Inventory counts and cycle counts are the industry accepted way of keeping accurate tabs on inventory. For inventory managers that find paper-based counts time consuming and error-prone, consider integrating a barcode scanning solution.
Innovia Consulting recommends Warehouse Insight – an add-on for Microsoft Dynamics NAV that brings mobile device integration to a warehouse setting. With Warehouse Insight, all inventory and management operations can be managed from handheld devices. This helps to ensure that the physical warehouse remains in sync with data in NAV. The manual tracking of warehouse transactions is no longer required, reducing the overhead and potential for errors resulting from double-entry of the data.
To learn more, contact Innovia Consulting or download the white paper from Insight Works’ to learn more: Keeping the Physical World and the Virtual World in Sync.
