Control Over Resources
Source: Publisher Business Life, №7(62), August 2012
Author: Tairov Rustam
- Rustam what is the subject matter of inventory?
Inventory (inventories – find out, reveal) – these are practical activities associated with confirmation of availability, status and valuation of property of the company in order to ensure reliability of data of accounting and reporting.
Significance of physical inventory can be considered with relations to interests of different users of information received when taking inventory. For example:
- Owners and managers of companies with relation to assessment of real business status, as well as activities of companies’ managers;
- Financial services of companies with relation to accuracy of value of inventory and its presentation in reporting;
- Logistics services with relation to increase in efficiency when managing inventories;
- Internal audit services and safety services with relation to testing system of internal control over inventories and etc.
– What kinds of problems companies may face when taking physical inventory?
Taking inventory in practice is a difficult and labor intensive process for companies, having considerable volume of inventories. This process very often has an influence on routine activities of companies. As rule, in order to take physical inventory it is necessary to involve considerable work power, including out of work time. This work time is the time of administrative personnel, that in addition to its direct responsibilities is also charged with tasks having not any relation to its duties. The administrative personnel very often do not understand in full the meaning of the tasks it is charged with.
Based on our experience gained when observing inventory taking under audit procedures and when providing services connected with arrangement conduction of inventory we may state that very often inventory taken by a company’s own forces does achieve purposes set and sometimes add to the problem when inventories managing.
“Human Factor”, lack of certain procedures on inventory taking, unreadiness in inventory taking and misunderstanding of the purpose may be one of the main reasons of the situation.
An importance of “Human Factor” is very often underestimated by the management of companies. Inventory taking is very often hard physical activity and work in difficult and new conditions for employees. This situation usually causes a protests, and hidden sabotage of the process. Could you just imagine the state of administrative apparatus that must inspect, sort and count thousands of items in full blaze of the sun or in cold warehouse instead of performance its direct responsibilities.
No wonder, that the inventory taking process is often limited to making marks in correspondent columns on a pro forma basis considering mutual agreement of persons responsible that were appointed for inventory taking. Such an “inventory” has no sense and it may entail negative consequences. The correct data can be misrepresented in addition to unnecessary expenditures incurred for arrangement of such the inventory as a result of neglectful approach in the accounting system. One must understand that in certain cases specialist of the company may be not interested in investigation of the truth.
– Does it mean that the procedure that has been applied for to improve accounting may misrepresent it and entail losses?
Exactly. Cases, when a company, taking regular inventory, using its own resources and performing procedures on a pro forma basis were bound to acknowledge an evidence of partial loss of control over inventories and considerable losses have occurred in our practice.
For example, misrepresentation in accounting may entail negative consequences as unforeseen lack of necessary inventories or excess inventory (“related” кcapital), violation or failure to execute order in time and etc.
Other considerations, that losses caused by stealing, ethic and physical aging, cannibalization and etc. are written off for account of net profit of the Company, if it is impossible to recover losses from responsible persons. At that the cost of losses is not limited to prime cost of inventories lost. Just simple computation may show economic consequences of inventory loss. To compensate for losses of inventories to the amount of 1 mln tenge, the Company having the rate of profitability of 10% shall ensure an additional revenue of KZT 10 mln., excluding additional costs for search and delivery of lacking inventories, a risk of loss of a reliable supplier reputation and negative tax consequences.
Cost optimization is the topical issue in time of crises for the Company. We can often observe that the Company, seeking to cost saving reduce different cost items. At that inventory status is mess and mismanagement.
In our opinion, this status is caused by difficulties in taking decision by the management of a company concerning optimization of inventory due to the lack of information. Not without reason, there is an expression that that a storehouse, a place where supply services keeps their secrets. Inventory arranged and taken in a proper manner may become an effective instrument to optimize inventories and save costs of storehouse.
– What is the advantage of inventory taking by an independent specialist?
To achieve the best results in inventory taking you should apply to independent specialists. Independent inventory taking give us an opportunity to avoid all the above mentioned challenges that may arise when taking inventory using own resources. The main advantage of engaging of outside agency is its independence and fairness. Responsibilities of outside agency for results of inventory taking, terms and scope of inventory taking must be performed under civil law relations. A company, specializing in provision of this type of services, has an experience in difference spheres of business and experience gained in elaboration of methods and procedures and knows the ways of duly preparation, conduction and documentation of results of inventory taking. In addition to foregoing it also should be noted that engagement of independent specialists to take inventory is effective measures to prevent stealing misuse from the part of responsible employees of the company, since they understand that such a misuse will be identifies in independent inventory taking without fail.