If you hold inventory in your business process either as raw materials or finished goods, it is vital to ensure that misinformation about this inventory does not lead to inaccurate business decisions__or cause the financial statement to be misstated. Some of the most common issues stem from a lack of knowledge: We excessively rely on the system to make business decisions, we lack control, or we cannot guarantee the integrity of our data.
Who should bear the responsibility for properly managing this critical information? All functions have a role to play, and it’s necessary that everyone understand their position in the inventory management process. In particular, however, accountants have a fundamental duty to ensure that communication among stakeholders is taking place and that all relevant information is available and considered when making decisions.
Creating the dialogue
An enthusiastic and consistent dialogue among finance, procurement, production, and sales professionals is an important part of inventory management. Accountants should take the initiative to make sure this communication happens on an ongoing basis. Goals here include
- ensuring that there are policies around inventory management and control and that those rules have been followed
- guaranteeing finance’s involvement in the monthly inventory cutoff process
- understanding the cost structure as it is related to the inventory and communicating that structure to stakeholders
- making sure all functions understand the importance of each control process
- communicating to stakeholders all the components of pricing and costing that the business is using for its valuation, as well as the reliability of the pricing and costing sourcing.
Lack of communication frequently is the source of production bottlenecks, financial losses, and damaged reputations. Although customer relationship management tools can help, their usefulness is only as good as the information coming in.
Here is the point where the production manager must step in. As the person in charge of the plant, the production manager
- reviews the inbound and outbound shipment report on daily basis
- performs routine review of the appropriateness of inventory storage
- communicates major changes to the sales team
- ensures inventory security
- performs quality testing
- has proactive discussions with procurement professionals about material needs.
Production leaders should also be in constant communication with salespeople in order to understand customer expectations. After all, the production department is in the best possible position to make sure products reach end users built to proper specifications. And sales professionals are vital to the overall success of the business because of their interaction with customers. Therefore, salespeople must
- review sales requisitions and compare them to in-house inventory and expected production
- explain expectations to production and ensure that there is proactive communication with end users
- perform daily sales analysis and share that information with all stakeholders
- identify critical liquidation points to avoid obsolescence or lost value.
When all these key stakeholders work together and are dedicated to ongoing and open communication, effective business decisions will undoubtedly result. And the company’s bottom line will prove these efforts.
Ernest D. Kammogne is the founder of KED CPAs & Consultants. Prior to this, he spent many years in the micro-finance, banking, development, risk management, and financial industries. Kammogne is a Certified Public Accountant, a Certified Financial Service Auditor, and a Certified Internal Auditor. He may be contacted email@example.com.