Stock control: the basics

Managing inventory is essential for business. This resource explores basic elements and methods for stock control.

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What is stock control?

Stock control is tracking and accounting for the items you order, purchase, sell, use or manufacture.

Why is stock control important?

Stock control is important for 2 main reasons.

  1. Stock on hand, or quickly accessible, provides a business with the ability to make sales to meet customer demand and therefore generate cashflow to cover operating expenses and make a profit.
  2. Stock on hand is money tied up (asset) that is inaccessible until the stock is sold. This can impact on cash flow.

Types of stock

There are 4 main types of stock. Most businesses use at least 1 type.

  1. Raw materials — the materials, components, ingredients that are used to manufacture products.
  2. Work in progress — partly finished materials and goods that are currently in the manufacturing process at time of inventory.
  3. Finished goods — after the manufacturing process has completed, the goods ready to be sold or distributed.
  4. Consumables — stationery, photocopier toner, fuel that you use to run your business.

Knowing what stock to buy, when to buy it and how much to buy is essential for effective stock control and cashflow. Stock items may vary in value, and certain stocks such as food may be perishable or seasonal, which can influence how these items are managed.

Associated costs of stock

Stock can consume a large percentage of funds invested by your business. When considering costs, take into account the associated costs of managing stock.

These include:

  • ordering costs and terms
  • insurance
  • warehousing and storage costs
  • freight — how much it costs to get the stock to where you need it
  • financing — interest costs if you borrow funds to buy stock
  • life span of stock items — how long they last
  • spoilage costs — how much stock is wasted or disposed of.

Remember to include labour costs for each of the above.

For example, include the cost for the time it takes you or your staff to order stock, your warehouse and logistics staff to store the stock, and then pick and pack the stock when sold.

Balancing the benefits of holding stock against the costs

To manage stock successfully, find a balance between the benefits of holding stock against associated costs.

Costs include the money spent buying the stock, the labour costs involved in this process, the storage of stock, and insurance.

The benefit of stock on hand is meeting the immediate demands of your customers who are ready to purchase. Most customers prefer to receive products at the time they purchase them (or as close as possible to it) rather than waiting for delivery.

Be mindful not to hold too much perishable stock to prevent having to write it off as spoilage if it doesn't sell within the expiration date. This is particularly important with food items.

Tax tip

Small business owners often destroy or discard old stock without accounting for it in their bookkeeping as wastage or spoilage (i.e. cafes and restaurants discarding perishable foods that have passed their expiration date).

Check with your accountant as discarded or spoiled stock can often be written off in your bookkeeping records as a loss to the business.

Also keep in mind that:

  • too much stock means extra expense which can create a shortfall in your cash flow, incur excess storage costs and potentially lead to spoilage costs
  • too little stock means lost income in the form of lost sales, while also undermining customer confidence in your ability to supply the products at time of purchase
  • the wrong stock means lost income in the form of lost sales, write-offs and poor customer service.

Having the right stock readily available to sell can lead to:

  • increased sales
  • new customers
  • repeat customers
  • increased customer confidence and satisfaction
  • improved cash flow
  • lead advantage in the marketplace with positive review ratings and reputation.

Finding suppliers

Whether you're sourcing raw materials for manufacturing, buying stock from wholesalers or looking for the best internet service provider for your online business, finding suppliers who are reliable and meet your particular needs is essential.

Ideally, your suppliers are able to:

  • supply on demand without delays
  • hold your stock after you've purchased it at little or no additional cost to you
  • ship it directly to your customers on your behalf to save freight costs and time delays

Before you commit to working with particular suppliers, consider conducting online research or asking them how they source their supplies — do they source supplies from overseas?

By understanding how their business operates, and their logistics for receiving, you can recognise how delays may impact on supply to your business.

Find out more about reducing your stock control costs by finding the right suppliers.

Find out the various terms the supplier can offer relating to:

  • supplying stock promptly upon order
  • holding stock
  • accepting returned, slow-moving, or unsold stock and providing you with a credit
  • their policy for returning broken, soiled or damaged stock during transit
  • payment terms.

Consider negotiating payment terms with your suppliers that can help reduce your stock control costs.

For example, your payment terms with customers could be 30 days, yet you have 45-day terms with your suppliers. This could significantly reduce the amount of cash flow tied up in your stock.

Managing your stock

How you manage stock depends on the type of stock you use, how much stock you hold, and what resources you have available. Good stock management will help you maintain the right level of stock to meet customer demand and assist your cashflow.

When managing stock, think about:

  • quantities
  • sales
  • storage
  • current demand in the marketplace.

Tips for managing stock

If you have slow-moving stock, consider reducing your stock levels by returning items to suppliers.

You may also try to sell slow-moving items in a sale. This may reduce your profitability but free up your storage and improve cash flow.

It's also important to work out how much stock you need to hold to run your business successfully.

Adequate stock on hand means you can supply your customers at time of purchase and maintain a steady cashflow.

To determine how much stock you need:

Ensure your staff are trained to rotate stock using the FIFO method.

When new stock arrives, it is moved to the back, moving the existing or older stock to the front, so it sells first.

FIFO is vital to aid in selling perishable stock before it expires.

When buying stock, consider:

  • different demand levels for particular stock items
  • shelf life
  • ideal amounts to order for each item
  • minimum acceptable stock levels
  • when to order stock — based on time or quantity
  • how long to allow for reordered stock to arrive
  • if your stock needs are predictable and whether you can set a fixed quantity or regular interval for reordering stock
  • using sales negotiation skills with your suppliers for favourable terms of payment
  • how you can use cash flow, invoices and payments to manage debtors (your customers) by setting payment terms ensuring you will be paid on time.

Awareness of stock levels in your storage or warehouse is essential for good stock management.

Consider:

  • what perishable items or short shelf-life items are stored
  • how frequently you need to review your stock levels
  • how and when you should perform a stocktake
  • if you are using your storage or warehouse space effectively
  • what financial record keeping system suits your business
  • if your suppliers can hold stock for you
  • if your suppliers can deliver directly to your customers.

Security measures help ensure your stock is not stolen.

A storeroom or warehouse that is poorly secured and without security cameras, leaves your stock vulnerable to criminal behaviour. Unfortunately, this may sometimes include staff.

Implementing security procedures can include:

  • key access to management staff only
  • security cameras and monitors placed in highly visible areas to deter criminal behaviour.

Read more about managing this risk in business security and crime prevention.

Just-in-time is a stock control method designed to cut costs by keeping the amount of stock you hold to a minimum.

If you use a just-in-time method, you will only keep the exact amount of stock you need at any one point, and your suppliers will hold the rest.

For a just-in-time system to work, your suppliers need to be reliable and able to deliver on demand, without any delays. This method also runs the risk of running out of stock, particularly if demand changes unexpectedly.

Keeping track of your stock

Keeping track of your stock makes good financial and practical sense.

It helps you:

  • understand your stock levels to ensure you don't have too much or too little on hand
  • identify slow moving stock
  • detect theft and gaps in your stock levels
  • identify what to buy
  • understand your stock turnover.

It is also a good idea to implement an ongoing system for tracking items you have bought and used or sold.

Stock control systems

Whether manual or computer-based, the stock control system you use will depend on the size of your business and the type of stock or inventory that you have.

Some small businesses simply use a spreadsheet to manage their inventory. Others use software systems integrated with their accounting package such as Xero or MYOB. There are many software systems available to help you manage inventory, subject to the monthly budget you can afford when subscribing to the software.

Manual stock management

Manual stock management best suits businesses that carry a small amount of stock.

A manual stock management system might include:

  • a spreadsheet listing stock items sold against what remains to be counted in a stocktake
  • a stock book to record the items you have bought and used or sold
  • a reorder system based on your stock book
  • labels or codes for each item in your stock, including information about the value of each item, when you received it and its stored location.

Computer-based stock management

You can use simple computer-based programs to manage your stock. Computer software can track what stock you order and sell, and record the costs. It may also include a barcode scanner and point-of-sale (POS) machine. Many larger freight companies also offer comprehensive web-based systems to track shipments.

Stock control software can provide information on particular stock management techniques, as well as help with specific stock management problems. You may also be able to find a software program that is specific to your industry or the type of stock you hold. Talk to your industry peak body or suppliers for advice.

Often your business adviser or accountant will have knowledge of software available that may suit your business.

Stock control software tip

Try a demo of any stock control software before you subscribe to make sure it is suitable for your business.

Check the subscription fees and lock-in terms as some subscriptions charge per month and also charge fees per user or per device.

An industry association may also be able to offer financial members advice about different types of suitable software relevant for your industry.

Stocktaking

A stocktake aligns records of stock bought and sold with physical stock on hand. It can help identify lost, stolen, soiled or damaged items — which you may be able to write off as a loss, sometimes against the cost of goods sold, for accounting purposes.

An annual stocktake is fundamental to stock control and is one of the best ways to keep track of your stock. Some businesses undertake a quarterly stocktake to better assist their ordering and bookkeeping processes.

Performing a stocktake involves making a list, or inventory, of all the stock you hold. You should be able to track each stock item by its:

  • unique item number or stock keeping unit (SKU)
  • stored location
  • selling price (if applicable)
  • cost price
  • stock number
  • cost
  • quantity
  • source of supply
  • applicable tax
  • point-of-sale details.

Stocktaking results should be included in your financial record keeping.

A small business stocktaking tip

A simple way to record lost, stolen, soiled or damaged items is to create a spreadsheet which includes the details of the product as well as its price.

This spreadsheet can be used daily for any wastage or damaged items and provided to your accountant to write them off as a loss, where appropriate.

Stocktaking legal obligations

Depending on your stock and the size of your business, you may be legally obligated to perform an annual stocktake for tax purposes.

Accounting for business trading stock, from Australian Taxation Office (ATO), describes stock as 'anything your business acquires, produces or manufactures, for the purpose of manufacturing, selling or exchanging'.

Under Australian tax law, you record the value of all trading stock you have on hand at the beginning of your income year, usually 1 July, and at the end of your income year, usually 30 June. In your first year of trading, this may not be a full financial year.

This enables you to work out whether or not you have a taxable income for the year. The best way to work out the value of your stock on hand is to count and value it by performing a stocktake.

If the value of the stock at the end of the financial year is more than it was at the beginning of that year, you must include the difference as part of your assessable income when you lodge a tax return.

If the value of stock at the end of the year is less than it was at the beginning of that year, your assessable income will be reduced by that difference.

If you can make a reasonable estimate of the value of your stock and you believe the change in your stock value over the year is less than $5,000, you may choose not to do a stocktake. However, performing an annual stocktake is a valuable method of stock control and you may decide to do one anyway.

The ATO has information on how you can estimate the value of your stock in their simplified trading stock rules for small business.

Calculate your stock turnover

One commonly used measure of stock performance is the stock turnover rate. This rate indicates the number of times the stock in a business has 'turned over', or been replaced, in a year.

Stock turnover rate is considered to be a measure of sales performance; usually the higher the stock turnover rate, the better your stock/business is performing.

The lower the rate, the longer the stock is taking to turn over. Funds are invested in stock for longer periods, which, in turn, has an adverse effect on cash flow.

To calculate your stock turnover, you first need to work out your average stock value. To do this, look at the value of your opening stock and the value of your closing stock.

Calculate stock turnover

Stock turnover is also known as 'inventory turnover'.

$$\text{Stock turnover} = \frac{\text{Cost of goods sold}}{\text{Average stock}}$$
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Understanding your turnover

On a cost of sales basis, the average stock turnover rate for manufacturers may typically range from 4 to 21 times.

Various industry associations and professional organisations publish these types of values periodically, and they can be a useful guide for matching up your own business performance.

Using your stock turnover rate

Your stock turnover rate can help you work out how effectively you are managing your stock.

Reviewing your stock choices

When you review your stock turnover, look for trends such as constantly moving items or items that rarely sell. By not ordering the items that don't sell well, you can reduce your costs and make room for new items that might sell better.

Items that have a high stock turnover rate are essentially your best sellers. Consider ordering more of these items and driving further sales through marketing, advertising and promotion.

Calculating your minimum stock levels

You can also use your stock turnover rate to calculate minimum levels of stock needed. Your minimum stock levels, and the types of incidents that could affect them, can be identified in your business continuity plan.

Benchmarking your business

You can compare your stock turnover rate to other similar businesses. This can help you work out how well you are performing and what areas you might need to improve on.

Find out more about benchmarking your finances.

Valuing your business

Your stock turnover rate can help you value your business.

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