BY FORREST FLINN
Have you ever wondered why the book value of your parts and accessory inventory is so different than those reported on the balance sheet? Does the book value typically have a higher value than what the physical inventory states? This topic is faced by every dealer at some point in time. And every year, I have to deal with this issue as well with my accounting clients. This month's blog will focus on some common types of transactions and internal controls that can be put into place to help you keep your physical inventories closer to their related book values.
My physical and book value of parts is way off! What do I do?
- Have a good starting point. Some dealerships do a physical inventory every year. Some don’t because they feel that it is a waste of time and money. Then there are the dealers that fall in between those two scenarios. Then some do a physical inventory and do not record the adjustments to their books and records as a loss or gain because the difference is too significant. My advice to every dealership is to do a REAL physical inventory that takes time in planning and execution. Then make the necessary adjustments to bring the book value of parts and accessories into line with the real value of your parts and accessories.
I have done a physical inventory and made the necessary adjustments, and I am seeing the differences grow and grow! What do I do now?
- Are your accounting procedures in line with your parts receiving procedures? Most Dealer Management Systems out there produce an invoice for each receiving session so accounting can reconcile that invoice with its related payment. In other words, are we paying for the inventory that we are actually receiving into the system? In my opinion, we should RARELY have to put an invoice into the system without its supporting receiving paperwork for parts and accessories. But the reality is many "adjustments" are being made in accounting without the supporting paperwork. Each time accounting pushes an invoice through inventory, the book and physical values are becoming further and further apart.
- Are sales and service employees taking their own parts for deals or repair orders? This is an ongoing issue for many dealerships. In some dealerships, technicians come and grab their own parts and do not run them through the system from time to time. The same goes for the sales department team members. Every time this happens, the value of your parts book and physical values are becoming more and more out of balance. It should be your dealership's policy that only parts team members cashier out all internal transactions from parts to sales and service. If your dealership is large enough, you might want to consider having a dedicated person handling these types of transactions.
- Changing on-hand quantities on parts and accessories. In some accounting systems, when somebody changes the on-hand quantity of a part number, a related “inventory adjustment" is recorded in the accounting system. But this is a feature that is turned on or off depending on how your dealership is set up. If this feature is turned off for your DMS, then the process becomes a manual one to record the differences. I strongly urge all dealerships to limit security in their DMS's on who, and who cannot change on-hand quantities. Also, find out for sure if your system automatically books these on-hand changes. If your DMS does not make these changes, and nobody is making manual adjustments, then this issue alone can cause differences in your parts and accessory inventories.
- Normal Shrinkage: Normal shrinkage in retail is a misunderstood and disturbing word. Shrinkage refers to internal theft, shoplifting, error, and fraud. According to Forbes, shrinkage cost retailers $46.8 "billion dollars" across the retail industry. Also, in 2018 the average shrinkage costs retailers about 1.33 percent of sales. (Forbes) Shrinkage alone, over time could account for the lion's share of your inventory differences. By developing strong internal controls on your inventory, you could limit these shrinkage costs materially over time.
There are many other causes for differences between your physical and book value for parts and accessories. Still, the five listed in this blog are the big ones that every dealership faces and are the most common. It is that time of year where you need to start setting up goals and planning for 2020. Maybe it is your time as a dealership to wrap your arms around a problem that has been dogging you for a long time. Or you can continue to keep your head in the sand and live with the differences. I suggest you face the issue in 2020 and make a commitment to becoming better at controlling your parts and accessory inventory and their related variances.
After all, it is just good business.
Forrest Flinn, MBA, PHR, SHRM-CP, SMS has been in the motorcycle industry for more than 23 years and has been a true student and leader serving in various capacities. He previously worked as an implementation consultant for Lightspeed and as a general manager with P&L responsibility for a large metro multi-line dealership. Recently Forrest became an Associate Recruiter with Henry Lonski and Associates and is also the managing partner and chief visionary for a consulting firm that specializes in outsourced accounting, social media strategy, dealership operations consulting and Lightspeed/EVO training.