Financial Reporting Hazards

by Dan

There are several financial and reporting hazards of inventory build-up and holding stock in excess of short-term needs.  First, it takes cash to build inventory, and many companies are required to take out short term business loans.  When money is borrowed, interest needs to be paid, and businesses will have to take that interest directly from their bottom line.  Next, more inventory means more space required to store it.  This excess space is also going to come out of the bottom line in the form of rent and utilities management.  It also costs a company money to be keeping track of this excess inventory.  Whether ongoing or annual – counting will cost.  To complicate the financial hazards, this counting and reporting will also be hazardous.  If there is excess inventory, the accounting and reporting will be inaccurate, creating a new range of problems for the company.  The reporting hazards could include – accounting that may show the company as being in debt for the cost of the supplies, whether it’s being sold or not.  It might also introduce the temptation for unethical reporting in order to avoid the company showing negative numbers.  If discovered this unethical accounting could be devastating for the company’s legal standing.

Often excess stock builds as a lack of adjusting order quantities when due dates or requirements change, using planning factors that are inaccurate or out of date, and/or accepting orders early from their suppliers.  Usually, it can be avoided by better accounting, reporting and planning for future changes in the market. Stock control must be an ongoing and regular basis.

There are ways to avoid excess inventory and the financial hazard that accompany it. One is the JIT or “Just In Time” system.  In this method of supply acquisition keeps little or no inventory.  They will manufacture their goods as orders are placed rather than keeping stock. This can also keep accounting simpler as they will likely use backflush costing, accounting for costs only after production of their products (which are already placed for order) are complete.

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