Streamlining Inventory Reconciliation

March 13, 2018
Inventory reconciliations don’t have to feel tedious if you refine your processes, and take note of where errors are most likely to be made.

It happened nearly two decades ago, but, by the sound of it, the wound still feels fresh for Jay McGovern. Back in 1999, McGovern, the parts director at Century BMW and Century MINI in Greenville, S.C., endured a nightmare scenario with regard to inventory reconciliation.  

“During a buy-sell that I was involved in, it came back that the physical inventory was $25,000 short,” he says. “That will cause a parts manager to lose a lot of sleep.

“It took me a day and a half going back through journal entries on the accounting side to find out that somebody in accounting had posted something backward. Everybody’s human; they’ll make mistakes, and you just have to find it.”

It can feel tedious to do inventory reconciliations for balance sheet accounts, in an effort to ensure the reliability of a parts department’s financial documentation. And, it may be fairly time consuming to count damaged or outdated products, along with those available for sale in current stock. Yet, the process is undeniably important.

Consider: If a parts manager discovers even a 5 percent variance for a $500,000 inventory, that equals $25,000—a number likely to leave a dealership owner displeased. A thorough reconciliation can help avoid such issues.

Over his 40 years in the industry, McGovern has discovered how to minimize mistakes during inventory reconciliation, resulting in his departments typically having a variance of 1 percent or less. In an interview with Fixed Ops Business, the parts director shared his advice for streamlining the reconciliation process.

The first thing you’re going to look at is your inventory balance. Has it changed dramatically from previous months? A parts department’s inventory will normally remain the same dollar figure, month after month, unless you’ve done some unusual buying, there’s been a huge appreciation, or depreciation. Pay attention to whether or not you’re continually carrying an outstanding credit that you haven’t received yet. Then there’s a problem; either you’re never going to get it, or it got past you and got to accounting.

For the monthly reconciliation, I gather all the information on the parts end, what my DMS shows to be on hand. Then, I gather outstanding pending credits and invoices not posted to accounting. I submit that to my comptroller, then enter all the information from what the book value of the inventory shows, and if there’s a certain percentage discrepancy, then we have to go back and review, and try to be below a 4 percent difference.

We have an Excel spreadsheet format that we use. And it’s very good, because, basically, at the end of every month you’re going to get a management report from your DMS, and ours says, “Take this figure and put it in here from there.” So it’s pretty step by step. The sheet is very simple and explanatory. Then the accounting comptroller uses the same sheet, and on the lower end of it is where he puts all his figures. On the very bottom it tells you how short or over you are.

It’s important to understand how things get posted for a sale, gross profit, or relieving of inventory. And, knowing how your sources are “chained.” You have a source for parts—you know, fast-moving, maintenance parts. Let’s say you have a retail counter ticket that’s sale-type and it’s chained to post to a retail sale on the accounting side, which then relieves the physical inventory with the cost amount. All those accounts are chained together—this is going to add gross here, deduct from the accounting balance here. I was once asked to look at a dealership that had done a physical inventory and was showing up short a month later—what I found was, with the sales to internal, if the counter person sold floor mats to the new-car department, everything looked legitimate, but there was something missing in the chain, so it never relieved the physical inventory and just went to Neverland in the computer system, causing their shortage. So, you need to make sure everything is properly chained.

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