Did the stock-take check out?

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The financial year has ended and has seen many companies carry out a stock-take. Proper and smooth stock-taking is often seen as being the tedious duty of accountants, and a process that obstructs the company’s activities for a few hours or days. In reality, stock-taking does not just concern accountants and can be organised more effectively and reasonably by focusing on the most important things.

The requirements for stock-taking are established in the Accounting Act and the public sector’s financial accounting and reporting guideline, but mainly in internal regulations (internal accounting rules of procedure, other internal procedures etc.). Each entity is different in terms of its inventories and assets, which makes it important to document the principles of stock and stock-taking in internal documents.

Stock-taking helps:

  • ensure that stock/assets exist; 
  • compare the recognition of stock/asset with financial accounting data;
  • document surpluses or deficits of stock, and correct data;
  • determine whether the conditions for the storage, preservation and use of stock are fulfilled or not;
  • detect any deficiencies and fraud.

Common problems and obstacles can be solved

The quality of stock-taking depends on the preparations made prior to and the organisation of the stock-taking. Thorough preparations allow you to ensure that the time spent on stock-taking and analysing the results can be measured in days instead of weeks. In practice, some of the following common problems arise in stock-taking.

  • An inconvenient date was selected for stock-taking 

    The farther away from the balance sheet date the stock-take is performed, the greater the risk that something will go amiss in the period between the stock-take and the balance sheet date, leading to errors under inventories or non-current assets on the balance sheet. The date is also important for the organisation’s level of activity, as the constant movement of goods prolongs the counting process and discrepancies may turn out to be quite excessive. 

  • Excessive discrepancies occurred 

    At the end of a stock-take, discrepancies are usually identified between the financial accounting data and the actual status. Some discrepancies between physical stock and the quantities counted during a stock-take are inevitable and quite normal. The aim of the end-of-the-year stock-take is to identify the items that may have been mistakenly expensed in the preceding 12 months or, vice versa, mistakenly not expensed. In an organisation with coordinated activities, such discrepancies cannot be overly significant.

    Unnatural results or unreasonably excessive discrepancies are indicative of poor warehouse accounting or stock-taking, or even fraud. Stock-taking is therefore not complete in itself and an analysis of the results should follow. If it does not seem believable that the identified differences are due to human error, it may be necessary to form a workgroup to improve the quality of warehouse accounting or to determine any possible fraud.

  • The members of the stock-taking committee left the company

    The current labour market differs significantly from what it was a few years ago. Depending on the field of activity of the company, increased competition may entice long-term employees to go work elsewhere, or the company may need to restructure work duties and roles due to its financial circumstances.

    If the company’s warehouse or logistics manager – who is often also appointed the head of stock-taking – leaves immediately before or during the stock-take, having well-prepared process descriptions in place are an important lifeline for the organisation of the stock-taking. The more thoroughly the organisation of stock-taking and the recording of results are documented, the easier it is for a new employee to continue with the stock-take.

  • Stock moved during the stock-take 

    Stock should not be moved about during stock-taking. However, this cannot always be ensured. If it cannot be avoided, incoming and outgoing goods should be accounted for. NB! The movement of goods around the warehouse also has an effect on the counting process. This may happen when production workers move stock to their area of work or packaging employees package goods for dispatch. Such activities should be suspended until all the goods have been counted.

  • Gathering the counting sheets was time-consuming

    If the company has a big warehouse, it is sensible to divide those engaged in stock-taking into teams. In order to comply with the principle of four eyes – two people confirm each recorded number – it is sensible to divide employees into pairs. Performing counting on paper results is extensive administrative work for the person responsible for the stock-take, who could otherwise use his or her working hours engaged in something more productive for the company.

    Therefore, it is recommended to use automatic solutions to gather the results, if possible. This may include using scanners (if the products have a barcode) or a shared document (Excel) on the company’s intranet, into which the counters can enter results on an ongoing basis. It is important to ensure the traceability of counting – who entered what and when.

  • Counting sheets were completed poorly

    A stock-taking counting document must not show the warehouse accounting balance. This reduces the possibility of manipulating the results. Stock-taking data must be entered in lists indelibly to ensure that the possibility of manipulating the results is small. Corrections to lists are made by striking out or, in the case of scanners, as a correction line.

  • Stock was counted twice or not counted

    Counters must be familiar with the goods being counted. This reduces the risk of counting errors and the risk of fraud. The person responsible for the goods may simply show the wrong item to the counters. 

    If possible, goods should be counted in a physical sequence (i.e. on the wall-to-wall principle). If this is impossible or inefficient, a principle of counting should be established. In order to reduce the risk of counting goods twice or leaving some goods uncounted, the counted goods must be clearly marked. 

    A stock-take must take into account all the company’s warehouses and locations, including external warehouses and goods held at other institutions. The goods of another owner must be clearly separated from the company’s goods in order to avoid counting these by mistake.

Checking and instructing the stock-takers 

The stock-taking committee must be as independent as possible, while also being familiar with the goods. A person responsible for the stock should be present at the counting in order to make stock-taking easier and help, if necessary. The counting process must be supervised and traceable.

If it is not expedient to count goods in opened packages one by one, a level of precision must be established in internal guidelines. Consideration should also be given to the moment of expensing the stock, i.e. in the case of less valuable packages, the option of recording the goods as in consumption upon the package being opened. 

The condition of assets/stock must also be assessed

When stock-taking, the condition of the stored assets/stock should also be assessed. If stock-takers fail to notice that some goods have expired and the company’s logistics unit for some reason does not have information about it either, such goods may be recorded on the balance sheet at an incorrect cost.

Another significant risk in production is a lack of high-quality raw material, although the balance may show the existence of stock. Such a situation may result in production downtime. We should also not forget the possibility that rodents, water and other such may contribute to reducing the value of goods or even destroy goods in storage.

If the condition of goods is not carefully checked in the course of a stock-take, such instances may go unnoticed. In the public sector, a clear requirement applies – assets and inventories not used must be discounted and taken off the balance sheet.

Daily warehouse accounting should work on the principle that stock-taking has a checking function and not an accounting function.

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