IPO Internal Management Optimization-Inventory and Account

The importance of inventory and account management

Warehouse management plays a very important role in the operation of a business.  Accurate inventory information is a very significant management basis for a company that going to launch an initial public offering (IPO).

To ensure the efficiency and effectiveness of production and goods selling, we shall not neglect the management of inventory. Poor warehouse management not only brings negative impact on a business’s revenue meanwhile abnormal issue will happen in a business’s operation process which show in figure 1.

Figure 1

The challenges of inventory and account management

In order to implement inventory management, the company can start from two aspects: entity management and account management. Then analyse the details that affect the inaccurate of inventory account which shown in figure 2.

Figure 2

I) Poor Entity Management

• Improper Inventory In and Out Management

Open warehousing is difficult to manage for inventory in and out records and have the risk of corruption. Closed warehousing should be adopted and it should be managed by a specific person. The access inventory control should be strengthened too. If there is any changes in inventory, an application for the transaction document should be submitted. This application information is used by the warehousing manager to check and implement the issue. Standard Control Procedure and accounting reconciliation control need to clearly define throughout the internal management system.

• Improper Inventory Storage Management

1. Unclear Inventory identification:

Many company have not established a clear inventory labelling mechanism. There is no label on the actual inventory to indicate the product name, specification, validity period and other information. Without labelling, it is necessary to rely on the warehouse management to make manual judgments which may lead to wrong picked materials or unable to track product’s validity period.

2. Improper planning of storage location

If the warehouse storage location is not planned for various characteristics of the inventory and it is not clearly marked for the return of goods, material, scrapped product and qualified product. The inventory may be misused of the stocks (For example, the materials to be returned are misused and put into production or the unqualified products are shipped to the customer) Besides, the terrible traffic flow in warehouse will decrease the productivity. Therefore, even if the small warehouse that hard to divided into several areas or the large inventory that is difficult to move, it still recommended the warehouse management to plan the storage location accordance with the current situation of the item transfer, convenience of operation and label them with the sign board or coloured tape to separate the storage area. Furthermore, the physical storage location can be integrated with the virtual storage management function in Enterprise Resources Planning (ERP) system. This function is used to record the storage location of the inventory, so that the manager can keep track of the inventory information and improve the capabilities of the inventory planning management.

• No inventory adjustment and monitoring mechanisms

1. Inventory count

Regardless of the inventory management method, it can be divided into perpetual inventory system and periodic inventory system. Regular inventory count is an important method to check the tally on inventory account and find out the reason for inventory differences. If a great inventory mechanism is not defined then inventory count would become meaningless. A good inventory management should be clearly defined from inventory plan, first inventory count, responsibility of inventory re-count and the freezing time of each inventory. The results of inventory count and its report should be true to find out the reason of profit and loss. Track and review the differences to improve the possible solution. It is recommended that the inventory manager who adopt the periodic inventory system should be fully inventory count at least once a quarter but it is better to implement perpetual inventory system for mid-high price of inventory to protect the safety of inventory and as objective reference for verifying profit and loss.

2. No daily audit monitoring mechanism

For example:

• The quantity of material picking is abnormal like the material not picking according production plan will causing the material under or over picking.
• The quantity of goods stock in is abnormal like the amount of stock in is greater than its initial input.
• The quantity of purchase is abnormal like the quantity received is much larger than the purchase order quantity due to the over-received ratio is not defined.

If the goods already stock into warehouse but the picked material has not been updated into ERP system, this will affect the accuracy of the cost of production material.

It is suggested that daily audit needed to monitoring and checking inventory cycles regularly to detect inventory missing, abnormal, and corruption then improve from it.

II) Poor Financial Management

• The account entry not timely (on time)

If the transactions of stock or transfer stock do not updated on time, then it will delay the closing of current stock month. For example, the goods received note does not key in on time, then the ERP system cannot update the account on time too.  False increase or decrease of inventory may happen during the emergency shipment or the goods are pre-debited because this type of transaction note have to key after it happens.

• The account entry incorrect

A company might have many item moving in or out daily, in order to key in all of the information into ERP system, the accuracy of the quantity often be ignored. For example, the on-site unit is different from the inventory unit and caused the unit conversion ratio is low in accuracy also have higher possibility to have an account error. Human calculation should be reduced and use the review mechanism or the auxiliary tools such as automatic counting or weighbridge. Besides, the system virtual storage management function can be integrated with physical storage in order to increase the precision of in and out quantity.

• The imperfection of system’s function or control

To achieve the inventory and account tally, rather than focus on entity management and operation process, it is also important to control through the system. The common control missing when using ERP:

1. Incorrect of the basic data

One item corresponds to multiple item numbers or one item number corresponds to multiple material, and the warehouse does not control on negative inventory.

2. Too flexible with no necessary control

In order to cater to user habits and simplified the process, the system design is too flexible to omit the necessary control. For the convenience of on-site storage, there is a stock in order for the unfinished picking process.

The planning of the system process shall be based on the principle of internal control, establish and improve the system authority that fulfill functional division of labour to prevent happening of inventory accounting error.