Time to take stock and stock take

It always amazes me how many businesses out there still put little reliance on thinking about stock and work-in-progress. There are lots of practical reasons why counting stock and valuing work-in-progress is an excellent idea; forward planning on stock requirements, monitoring cashflow requirements, improving physical controls around stock, and reducing the risk of stock going missing to name but a few. However, as an accountant, I would say there is an absolute crucial reason for focusing on counting stock and valuing work-in-progress each month, and that is because without it, you have no idea how your business is really performing on a monthly or quarterly basis. Correctly accounting for stock removes the need for qualifications or explanations around performance. A pet hate of mine is seeing clients management accounts with profit margins jump all over the place from month-to-month, and then to have them explain to me that one month was particularly poor because that had a big purchase in it, and one month looked excellent because that was when all the invoicing was done. With this noise, it is impossible to really understand what a good month and bad month looks like.

The below graph shows the same 6-month data for a business including and excluding stock movement. As an illustration, you can see that you would have drawn very different conclusions from the performance of each month based on the margin with or without stock movement.

It may seem simple to many, but there are still large amounts of businesses not putting the time and effort into accurate stock counts, and without them the numbers are largely meaningless. Please ensure stock and WIP valuations are not an afterthought in your business and make them a fundamental part of understanding the performance.