The thought of a year-end inventory audit can cause a lot of trepidation for ecommerce business owners, and yet, audits are an important part of a solid inventory management strategy. Whether the audit is conducted for internal purposes or at the request of an external auditor, having a clearer understanding of your inventory levels is essential to the health of your online brand. Fortunately, an inventory management system can provide exceptional visibility into your stock counts, saving you considerable time and effort as you’re auditing your inventory.
What is an inventory audit?
An inventory audit is the process of comparing your actual inventory levels to your financial records, as a way to ensure accurate inventory accounting. Sometimes, inventory audits are as simple as performing a physical inventory count of your existing stock, while other times they might involve a third-party auditor who can confirm whether your records and stock counts match. Audits are a vital component of inventory management, given that they identify shrinkage and ensure you have the correct inventory quantities at all times.
Ultimately, a greater knowledge of SKU and product movement will boost your company’s workflow, since you’ll always know what (or which) products you have available.
4 reasons why auditing inventory is important for ecommerce businesses
A well-executed inventory audit is the best way to assess your overall inventory status (i.e. what’s consistently under or overstocked), and makes it easier for your company to navigate pivotal financial moves. Of the many advantages to auditing your inventory, among the most important are access to clear inventory accounting records, the ability to make budgeting decisions based on inventory records, the chance to identify inventory inefficiencies, and support to optimize your inventory control.
Get clear inventory accounting records
Inventory accounting records are centered on inventory valuation and accounting for changes within your inventoried assets. In general, inventory accounting assigns values to goods within all three phases of the production process — raw materials, in-progress, and finished goods — and then records these items as business assets. Since inventory audits give precise, detailed reports on your stock levels, these audits offer clarity and visibility around inventory accounting, which then leads to increased profit margins at each stage of the product life cycle.
Make budgeting decisions based on inventory records
If you don’t have a solid method for tracking your inventory’s value, you’ll likely have a hard time budgeting for the amount of inventory you need. However, auditing your inventory can deliver a more accurate budget, since you know the exact stock count you’re running through (and how much safety stock you need on hand). Regularly performed audits prevent you from wasting money or storing items that are always in surplus; audits help retailers determine whether they should discontinue excess inventory or redirect funds toward SKUs with frequent stockouts.
Identify inventory management inefficiencies
In relation to better budgeting, audit reports can identify inventory management inefficiencies that might be causing issues with your supply chain. These inefficiencies include things like stagnant or deadstock inventory, items with recurring stockout or overstock events, inaccuracies with inventory tracking and storage, as well as a number of other operational errors. With this information at your disposal, you can take the necessary steps toward eliminating excess goods, lean in toward what’s working well, and fully revamp your supply chain management.
Optimize inventory control
Inventory control is all about maintaining the right number of parts or products to avoid inventory shortages, overstocks, and other (rather costly) problems. One of the best ways to optimize inventory control is to leverage routine inventory audits, which can shed light on present stock levels or inventory quantities within your warehouse or fulfillment center. With the insights provided by inventory auditing, businesses can protect against making rash purchasing decisions and evade the expense of having too much available inventory at any time.
How to audit inventory?
An internal audit requires access to current inventory data from a variety of sources, like sales records, inventory counts, and even shipping manifests. While inventory audits can come in many different forms, the workflow is typically about the same; business owners need to acquire two separate records that both reflect the same inventory information.
If you compare these records to one another and it turns out they don’t match, the next step will be to investigate potential problems, such as missing or damaged items or mistakes within your financial statements. While the audit process can vary in complexity depending on the volume of inventory and the scale of your business, this is a good overview of how it generally proceeds.
Alternatively, some companies may choose to work with an external auditor, who will look to verify (1) that the inventory exists, and (2) determine its condition by overseeing the physical inventory count conducted by your team. When paired with a proficient inventory management system, a third-party audit will likely offer the most thorough inventory reports and spot discrepancies you might be unable to detect on your own.
8 inventory auditing procedures explained
Given the massive volume of some inventories, ecommerce companies might engage in a variety of audit procedures before they’re confident the valuation of their inventory assets is reasonable. Among the most respected and widely-used inventory auditing strategies are physical inventory counts, ABC analysis, freight analysis, and cost of finished goods analysis.
Count physical inventory
As its name clearly suggests, this approach is where you physically count your inventory items so you know exactly what you have available. A physical counting procedure is the most common way to perform an inventory audit, and typically involves a barcode scanner to record all your data electronically — though if you’re working with an auditor, they’ll help watch and reconcile your inventory levels with a general ledger to make sure the numbers match.
A cutoff analysis is when you ‘cut off’ your receiving and shipping operations (at the time of your physical count) to prevent goods from being mishandled or unaccounted for. If you opt to ignore this step, it can really throw off your data and lead to inventory issues down the road. Therefore, this pause is essential in eliminating mistakes associated with uncontrolled variables.
ABC analysis — also referred to as high-value item inventory — is a popular procedure for inventory assessments. With the ABC strategy, high-value (rare items) are categorized as A inventory, medium or (mid-value items) are sorted as B inventory, and C inventory are low-value items. This classification is especially helpful in organizing your warehouse locations, and makes it significantly easier to store and audit only those categories you want to.
If you find discrepancies within your inventory audit, you may want to conduct a reconciling items investigation to get to the root cause of these concerns. In this scenario, you should track certain SKUs (from your larger inventory) that are likely to have errors in the future, so you can get ahead of the problem and hopefully prevent further disruptions along your supply chain.
For businesses who ship their products to different locations, freight cost analysis can be a big help in determining shipping fees. That’s because freight analysis records when your items were sent, as well as when they arrived at their destination. In other words, freight analysis evaluates your lead time, which directly informs or affects your freight shipping costs. In addition, this type of audit also serves as a great way to document items that are lost or damaged in transit.
Cost of finished goods analysis
The cost of finished goods analysis is primarily used by manufacturers and producers. In essence, all goods are accounted for and given a distinct value upon completion to guarantee your financial statements are accurate. This type of analysis is particularly helpful if you create your own products, since it clearly demonstrates when an item is ready to be listed or sold (so an auditor can then value said inventory for your current accounting period).
While overhead analysis is decidedly optional, it’s still quite useful for companies of all sizes. Beyond the cost of your raw materials and labor, there are ‘hidden,’ overhead costs you’re accountable for as part of your total inventory costs. Auditing these non-material expenses (like rent, electricity, or other utilities) can help you anticipate all the indirect costs of doing business — which also assists with your budgeting process as a whole.
Similar to a physical inventory count, cycle counting involves manually counting your inventory items and comparing outcomes to the numbers in your system. Cycle counts, however, are a regularly repeated sequence of checks that focus on a select amount or subset of your total inventory. For that reason, cycle counts are less disruptive to your daily operations, and can provide an ongoing measurement of inventory accuracy and procedure execution.
How to simplify inventory audits with Extensiv Order Manager
Using the cloud-based inventory management software from Extensiv Order Manager, ecommerce business owners can monitor their inventory levels online, and access relevant inventory insights from virtually anywhere. Not only does Extensiv support companies in syncing their inventory data from sales channels, warehouses, POS systems, and more, but this system can automate operational duties and make auditing complexities much simpler and more straightforward.
Access and track inventory in real-time
Extensiv Order Manager’s innovative inventory system features perpetual inventory updates, meaning your stock counts are being refreshed around the clock. What’s more, this perpetual structure also includes real-time inventory tracking, indicating where your SKUs are at any point within the supply chain. This visibility into product movement can really aid in the audit process, too, since you can count on inventory reporting to be as accurate (and current) as possible.
Automate inventory workflows
Extensiv Order Manager’s proprietary Orderbot technology can be programmed to handle everything from real-time rate-shopping to automated stocking — that is, updating your inventory levels each time a product is sold. This automation eliminates the need for manual inventory counting and reduces the potential for human errors; in its place, it provides consistency across all channels, and makes inventory audits (and other time-consuming tasks) a breeze.
Optimize inventory control
Inventory control is vital to the success of a product-based brand, since the majority of your investments and cashflow are tied up in the inventory itself. With quality analytics from Extensiv Order Manager, you can gain clarity around vital inventory data like your cost of goods, inventory turnover, profitability, margins, and replenishment. And leveraging this info allows for optimized inventory control, which then makes the audit process run smoother and more streamlined. You can check out many of Extensiv Order Manager’s reports here.