Stocktaking is the physical counting and verification of items held in premises. Stocktaking frequency can vary from business to business but we encourage our clients to undertake, at the very least, a stocktake at the end of each Financial Year although we do recommend more frequent stocktakes. Here are the reasons why it is so important.
Measuring Margin and Profit
The most fundamental measurement of success in your business is Profit. In order to measure profit, you need to know what your stock figure is at the beginning and end of each Accounting period. Stock movement plus stock purchases determines the Cost of Goods Sold, which is subtracted from Sales to give you a Gross Profit figure. From this you deduct other overheads and expenses to determine Net Profit. Without an accurate Stock figure this process is meaningless.
Measuring Wastage, Damage, or Theft of Stock
Commonly referred to as shrinkage, by measuring stock movement and comparing it to stock sales you can determine whether stock is being stolen, damaged or misplaced. A stocktake undertaken regularly will assist in exposing any potential problems. Stock is one of your most valuable assets and if it is disappearing you need to know why.
Is stock popular or slow moving?
It is important to be aware of which products are selling and which are not. A stocktake will highlight this for you. The longer stock sits on the shelf, whether in store or in the warehouse, the higher the risk of it becoming worthless. Things that come into play are that it may have an upcoming expiry date, it may no longer be in fashion or, it has become redundant. Failure to monitor this, may result in the loss of money through discounting or stock write-off.
Stock Price – Is it accurate?
The cost of purchasing stock changes over time. The pricing strategy should be based on margin over cost, so understanding the value or cost of Stock on Hand is imperative. This will assist in ensuring accurate pricing and thus maintain your desired margin. Stocktakes are an ideal time to revise pricing strategies which in turn enables profits to be maximised.
Insurance – Is there adequate coverage?
Stock insurance is necessary for protecting your valuable asset in the case of fire/flood or theft. Knowing the value of your stock is important to ensure being able to obtain the right amount of coverage. Regular stocktakes will help you to be able to have the correct coverage for your needs.
What is the Value of my business?
A common method of valuing a business is Goodwill plus stock. Goodwill is based on a measurement of profit so a stocktake will assist in being able to measure more accurately what the business is worth.
There are many KPI’s and performance measures linked to stock value. If you wish to learn more about these please contact our friendly team at Davidsons on 03 5221 6399
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.