Tuesday, January 15, 2013

"Balancing The Books"

In most Parts Departments, the Annual Parts Inventory Count is performed at the end of each year for legal and accounting purposes. As in any business that manages an inventory, it is mandatory to account for inventory assets and it's overall value.

In most automotive dealerships, the Parts Inventory is one of largest assets that the dealer has to account for, especially when it comes down to "tax time" at the end of the year.

Even though Office Managers, or Controllers perform this similar function at the end of each month throughout the year, the "end of year" parts inventory balance must be reconciled between the Accounting Ledger and the Controlled Inventory Balance.

The "Controlled Inventory Balance" is defined as the inventory balance after the physical inventory is counted, completed and authorized. This inventory balance is also represented in the D.M.S. (Dealer Management System) after the inventory count and variances are posted.

So, what happens if the "Controlled Inventory Balance" amount doesn't match the Accounting Ledger, or Financial Statement Inventory amount?

First of all, the "final" Controlled Inventory Value MUST match the Accounting Ledger Value, or the Financial Statement Inventory Value.

In a sense, we have to "balance" the Controlled Inventory amounts to the Accounting Ledger by way of adjustments. This will also be reflected on the Financial Statement as "Adjustments to Inventory" and considered 100% as profit, either as a credit or a debit.

The second thing we have to realize is that "variances" after the physical inventory are common, but should also be within an acceptable range. Many inventory analysts suggest that this acceptable range be within two to four percent of the total inventory value on the Accounting Ledger.

Keep in mind that acceptable amounts should be to the positive side of the overall balance which means that the Controlled Inventory Value should be larger than the Accounting Ledger, or the Financial Statement Value.

Many dealers are primarily concerned about pilferage or theft and rightly so, but in most cases, there are usually many other causes for these discrepancies.

Here are some common variances that may lead to discrepancies between the Controlled Inventory Value and the Accounting Ledger Value:

  • Manufacturers' pricing updates not posted
  • Cost posting errors or overrides throughout the year by parts personnel
  • Pilferage or Theft
  • Parts "work-in-process" issues
  • Gas, Oil & Grease bulk adjustments
  • Tire Inventory adjustments
  • Damaged or Scrapped Parts not accounted for
  • Outstanding credits and/or debits from all parts vendors
  • New and used core inventories
These are just a few areas that can lead to discrepancies between the Controlled Inventory Values and the Accounting Ledger.

Most Parts Managers and Inventory Management Companies are well aware of these items mentioned, but inevitably, these are the most common areas that lead to discrepancies.

So, how can we limit these discrepancies to a manageable level each year? Here are few tips that may lead to some helpful solutions:
  • Make sure your "house" is in order by using good housekeeping practices
  • Conduct daily, weekly or monthly bin checks and post adjustments to D.M.S.
  • Insure proper security throughout the Parts Department.
  • Post manufacturers pricing updates monthly and provide D.M.S.documentation to Office Manager
  • Provide End of Month Parts Inventory Analysis Report to Office Manager for potential discrepancies between the Controlled Inventory and the Accounting Ledger on a monthly basis.
  • Conduct a monthly physical on "other" inventories such as Tires, Gas, Oil & Grease, etc. 
  • Review "Cost Override" and "Minus On Hand" D.M.S. Reports Daily
  • Manage Parts "Work-In-Process" and Special Orders to less than (30) days
Lastly, we have to keep a mental mind set that closing out our "End Of Year" should be no different than closing out our "End Of Month".

It's much easier to manage what happens over the course of a month as opposed to trying to manage what happens over the course of a year in the parts department.

 Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com