The Issue: On-site inventories of materials and supplies such as irrigation parts, edging, mulch, rock, sand, ice melt, salt, and nursery material are all probably held in one or more inventory accounts on your balance sheet. Taking a monthly inventory, where appropriate, in order to ensure the proper material usage amounts are moved off of the balance sheet account(s) for inventories and recorded as cost on the profit and loss statement every month is critical to matching revenues and expenses in the month they occur so that there is an accurate picture of cost of goods sold and gross margin.
The Bottom Line: Failure to properly reconcile inventory accounts on a regular basis leads to issues with overstated asset balances in inventory accounts on the balance sheet, and understated cost of goods sold and overstated gross margin and net income on the profit and loss statement. Left unattended for an extended period, a reconciliation could result in a shocking (and costly) one-time write-down to your profit and loss statement once the accounts are reconciled, adding significant costs not incurred during the financial period it occurs, reducing net income by the amount of the write-down, and leaving no ability to determine where, when or how those written-down inventories were used.
For more, read on.
First, the good news: There is no time like the present to clean-up inventory balances if they have been languishing for some period of time. Check with your financial team to determine what items are held in inventory and then get good counts for those items as of the last day of the financial period you will be making the reconciling entry. Add inventory reconciliation to the monthly financial closing checklist so that once it is cleaned up, future material usage is matched with other revenue and expenses from the same accounting period to ensure your balance sheet and profit and loss statements reflect an accurate overall financial picture.
Now, the bad news: Getting good inventory counts can be tricky because it is necessary to know the balance on hand as of the last day of the accounting period. This can be difficult if inventory is held at multiple locations or other factors, such as weather, delay your ability to get good counts for items like ice melt, sand and salt. Finally, it can be challenging to accurately estimate how much material is in a pile of mulch or sand, and difficult to consistently police the way that yard material use is accounted for. These are not easy issues to solve, and it is important for finance and administration to get input and buy-in from field operations to come up with a process that is workable to achieve both the accountability goals of the finance and administration teams, while still meeting the production goals of the field operations team.
What To Do? If your company is struggling with this issue, don’t put off dealing with it. Have administration and finance collaborate on a basic process, then work with a representative of field operations to hash out the details surrounding how to best obtain material counts and account for usage of yard inventory. Field operations’ assistance is critical, because they will likely be responsible for policing the part of the process that ensures yard material usage is properly documented and reported to finance and administration personnel for updating accounting records and also for collaborating regularly with administration to ensure material counts are accurate and happen on time.
Steele Dynamic Services, LLC is a green industry consultant focused on the internal business operations of our clients. If you need help with your inventory reconciliation processes, or just about anything else, visit our website at SteeleDynamicServices.com to see our full line of services and to contact us to find out how we can help you create the future you want!
