Stock can be defined as a supply of goods kept on hand for future use or sale to customers by a merchant, distributor, manufacturer, etc. Stock is also referred to as inventory. Stock can be categorised into four main types; raw materials, work in progress, finished goods, or consumables.
Stock control includes tracking and accounting for the items you sell, use or manufacture. Stock items may vary in value, and certain stocks may be perishable or seasonal, which can influence how you manage it. Knowing what stock to buy, when to buy it and how much to buy is essential for good stock control.
The stock control system you use will depend on the size of your business and the type of stock you have.
When you are developing a stock control system for your business, you need to take into account the associated costs of holding stock, such as:
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insuring stock.
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warehousing or storing.
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shipping.
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financing (interest costs).
It's also important to work out how much stock you need to hold in order to run your business successfully. You can do this by generating reports, calculating your stock turnover rate, and performing an annual stocktake, which may be legally required for some businesses.
For information on how to set up a stock control process, refer to set up a stock control process.
This video provides an explanation of stock or inventory control in a business.
Stock records are a useful method of monitoring stock and stock levels in your store. Their aim is to provide you with up-to-date information about the products your business uses. These methods can be manual or computerised. Like any documentation, the need for accuracy and regularly updated information is essential to its usefulness.
A typical stock recording system will include information about the product, such as:
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Name.
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Number.
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Size.
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Expiry (if applicable).
In addition to this, the stock record would include other important information, such as:
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Amount in storage.
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Minimum stock level.
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Amount on order.
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Cost price.
Manual stock control system best suits businesses that carry a small amount of stock. A manual system might include;
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a stock book to record the items you have bought and sold.
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a reorder system based on your stock book.
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labels or codes for each item in your stock, including information about the value of each item, when you received it and its location.
You can use simple computer-based programs to manage your stock. Computer programs can track what stock you order and sell, and record the costs. The program may also include a scanner and point of sale (POS) machine. Many larger freight companies also offer comprehensive web-based systems to track shipments.
Stock control programs can provide information on particular stock management techniques, as well as help on specific stock management problems. You may also be able to find a program that is specific to your industry or the type of stock you hold.
Different Types Of Stock Reports
Stock reports can come in various forms, depending on the requirements of your business. Computer programs developed for stock control can provide standard and custom reports when ever they are needed. Some types of stock reports are discussed below;
The end of the year stocktaking is the traditional way for a business to understand and assess the movement of goods in their stock. It is still widely applied and can be taken as the basis for the financial balance of the organisation.
End of the year stock reporting will establish an ending inventory. This is the stock a business has in storage at the end of the financial year. The ending inventory will confirm the movement of goods that the business has calculated and reported over the year; it will give a real, corrected report on stock levels which is needed for accurate planning and forecasting.
End of the year stock reports are also required for accounting purposes. Usually ending inventory is converted into ending inventory cost, in order to give a financial figure. The ending inventory cost is how much the business spent to get the merchandise in store.
The periodic system uses an occasional physical count to measure the level of stock/inventory and the cost of goods sold (COGS). If a business needs more frequent information on their stock they might apply periodic stock reporting. The advantage is that your data is more relevant in time, but this is opposed by your increased effort required to count your stock monthly or even weekly.
Periodic stocktaking will only make sense if the benefit from the increased control outweighs the disadvantage of the increased costs. This may be the case for a business with a large stock with very little variations, which can easily be counted; or a business where stock control is very important because your goods a perishable, or because supply of new merchandise in insecure or difficult. Periodic inventory accounting systems are normally better suited to small businesses.
With the advent of computer based control tools like bar codes and RFID (radio frequency tag) chips, permanent stock reporting has now become a standard solution for many businesses.
Permanent stock reporting can either be done by counting all items at point of sale by scanning the barcode of the item. In this way a business immediately knows what item has been sold and, theoretically, they should then also know what is left in storage.
In reality, a business will also have non selling losses (shrinkage), due to wrong data entry, theft, fraud, damage etc. All this will of course not be registered at point of sale, because these items never pass the point of sale. In short, while permanent stock reports are very valuable and helpful in planning and forecasting, they will not be able to deliver a 100% accurate picture of your stock and therefore will need to be implemented along side other reporting methods.
It is not enough to understand the movement of your merchandise. For accounting reasons, and for financial planning, a business also needs to understand the value of the stock, and the increase or decrease in value. For this purpose we need to assign a financial value to our stock. Financial stock reports can provide stock value, cost of goods (ordered, held, and sold), percentage of changes in stock value, and cost of stock loss due to lack of demand, theft, or breakage etc.
To understand estimating stock value, refer to estimating stock value as defined by the ATO.
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 that are invested in stock for longer periods has an adverse effect on cash flow.
To calculate your stock turnover, you first need to work out your average stock value by looking at the value of your opening stock and the value of your closing stock.
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Use this formula to calculate your average stock value;
Average stock value = (opening + closing stock) x 0.5
Example: ($24,000 + $36,000) x 0.5 = $30,000
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Use this formula to calculate your stock turnover ratio;
Stock turnover ratio = Cost of goods sold ÷ average stock value
Example: $210,000 / $30,000 = 7
Your stock turnover rate can help you work out how effectively you are managing your stock. When you review your stock turnover, look for trends such as constantly moving items or items that rarely sell. Funds that are invested in stock held for longer periods has an adverse effect on cash flow. You can stop ordering the items that don't move, which will reduce your costs and perhaps make room for new items that might sell better.
Items that have a really high stock turnover rate are essentially your best sellers. You could consider ordering more of these items and driving further sales through marketing.
You can compare your stock turnover rate to other similar businesses when benchmarking your business. This can help you work out how well you are performing and what areas you might need to improve on. Various associations and professional organisations publish these types of values periodically, and they can be a useful guide for matching up your own business performance.
Your stock turnover rate can help you value your business, which can be useful if you are thinking of selling.
You may be legally required to perform an annual stocktake of your trading stock for tax purposes. The Australian Taxation Office (ATO) describes trading stock as 'anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange'.
Under Australian tax law, you must 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 is so you can 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 $5000, 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.
Source: https://www.business.qld.gov.au/
You need to keep records of all transactions related to buying, maintaining, repairing and selling business assets or stock so you can substantiate the amounts reported in your tax return.
If your business buys or sells stock and is required to do a stocktake, you need to keep records showing the following information:
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a list describing each article of stock on hand and its value.
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who did the stocktake.
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how and when it was done.
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who valued the stock and the basis of the valuation.
Most stock records need to be kept for five years. The five years starts from when you prepared or obtained the records, or completed the transactions or acts those records relate to, whichever is later.
You should keep records long enough to cover for example a period of review (also known as the amendment period) for an assessment that uses information from the record.
Source: https://www.ato.gov.au/business/
This video describes stock taking / inventory counting.
