3 Steps for a Smoother Annual Parts Inventory
by Mike Nicholes, Owner, Mike Nicholes Capital Management
It’s that time of year again when your dealer principal or CPA requires a “firm” parts inventory count for tax and factory filing purposes. If you dread the event, you’re not alone. But it doesn’t have to be that hard. If you put several steps in place throughout the year to improve consistency and better secure your parts asset, you will minimize variances, risk of theft and dread of the annual inventory. I recommend every dealership put these three steps into place:
Implement a monthly parts reconciliation worksheet
The problem with an annual inventory is the word “annual.” You should not be reconciling your inventory only once a year; this is the ultimate act in futility. You should be reconciling every month to catch variances while they’re still fresh in your mind and fixable. With parts inventories averaging hundreds of thousands of dollars and considering the potential losses to a dealership due to mismanagement, it makes sense to check it monthly instead of yearly. Think of it this way: Would you balance your checkbook only once a year? Of course not. You balance it regularly to keep tabs on what is going on, catch any mistakes or overcharges, and ensure no one is fraudulently using your account.
I recommend an easy-to-use reconciliation worksheet that both the controller and parts manager complete. I offer one free of charge on my website partsconsulting.com. The objective is to come up with the total physical inventory amount and compare it to the accounting amount. The worksheet accounts for parts that you “own,” including the parts that are a work in process, and what you paid for each part. Once completed, the worksheet will give you your monthly variance, which should be within 2 percent. This helps to keep inventory value in line with the general ledger because you can make adjustments to cost as they happen. Say you really needed a part, so you bought it at a higher cost from a competitor. This would be reflected in the general ledger because you gave the higher cost to accounting and they adjusted the inventory value.
Conduct a monthly perpetual inventory of your 100-200 fastest-moving parts
Let me be clear: I am not saying you need to count your entire inventory every month. I am saying you need to count your biggest sellers, or most active parts. You should be able to pull a report of your biggest sellers from your DMS. Then you can compare your perpetual physical inventory to what accounting has in the computer. When you do this on a monthly basis, it’s easy to pinpoint and resolve the variances. For example, you can isolate if a difference is due to a part that was ordered but not invoiced, a work in process part, or a part returned to the manufacturer but not yet removed from the general ledger. If your count in the computer matches your count in the bin, your inventory is secure and you’ve set yourself up for a smooth annual inventory.
Focus on clear communication for a smoother process
Securing your parts asset is not rocket science, but it does require a process and discipline. Upper-level management can be instrumental in putting a process in place, communicating it to the department and ensuring the process is followed. Communication is the key when it comes to the relationship between accounting and parts. Typically, an accounting department has little understanding of the parts department, and vice versa. So if a discrepancy comes up, there can be tension between the departments. Clear communication and guidance from upper management can clear away this tension for a smoother process all around.
It’s nearly impossible to solve parts department and accounting differences with an annual inventory. It just puts too much time between when a difference occurred and when it’s examined. As a result, an employee may lose his or her job over a small cash shortage or a parts variance. That’s ridiculous since a theft is generally the exception rather than the rule. Instead, start monitoring your inventory throughout the year. You’ll stop dreading your annual inventory and better secure your parts asset.
Mike Nicholes has earned international recognition as a consultant and seminar speaker. He has conducted hundreds of seminars during the past three-plus decades for more than 46 major vehicle and equipment manufacturers. In addition, Mike has functioned as an in-dealership consultant/trainer for more than 11,000 automobile, truck, agricultural and equipment dealers.
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