This is a common response from clients when we encourage them to undertake a stocktake at the end of the Financial Year. 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. Stock is one of your most valuable assets and if it is disappearing you need to know why?
Is Stock popular or slow moving?
The longer stock sits on the shelf or in your warehouse, the higher the risk is that it is becoming worthless. It may have an upcoming expiry date, or it may not be in fashion or become redundant. If you don’t monitor this, you run the risk of losing money through discounting or stock write-off.
Is Stock Priced correctly?
The cost of purchasing stock will change over time. As your pricing strategy should be based on a margin over cost you must understand the value or cost of Stock on Hand. This will always assist in pricing accurately to maintain your desired margin.
Is your insurance adequate?
A necessary evil is stock insurance as it is protection for a valuable asset in case of fire/flood or theft. If you don’t know what your stock value is, how do you know what to insure it for?
What is the Value of my business?
A common method of valuing a business is Goodwill plus stock. As Goodwill is based on a measurement of profit. If you don’t carry out a stocktake, you can’t measure Goodwill or stock, so you have no idea what your 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 your Davidsons advisor or our Business Advisory Team at info@davidsons.com.au or (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.