Effective asset accounting and control is essential for sustainable business development. Many challenges in business are caused by both internal and external factors. Managing and preventing risks caused by external factors in some cases does not only depend on making the right decisions in the business and implementing them, which is absolutely the opposite in the case of internal factors.
Therefore, it is not surprising that for business development, it is inevitable to conduct correct, timely and fair accounting of operations, which affects the company’s income and expenses and ultimately profitability. Particularly close attention is required for complete and accurate accounting of assets, which includes both commodity inventories and accounting for fixed assets and their control. There are often cases when the established control practice is incomplete, weak or contains a deficiency that materially harms the interests of the company. This becomes especially noteworthy when the problem is obvious and requires timely response and correction. In such cases, there is a high tax risk and financial risks, such as incorrect data on the quality and value of the asset, a high risk of accurately assessing profit or loss, operational risk and others that clearly indicate a lack of control and correct accounting. The listed risks are manifested by the following symptoms:
- Identify significant excess and/or shortages in inventory
- Large volume of losses
- The presence of unreasonable expenses in business
- The presence of write-offs – useless fixed assets on the balance sheet for a long time
- The existence of reduced inventories
- Material differences between the accounting balance and the actual balance through selective verification
- Disproportionate volume of balance per SKU (Stock Keeping Unit – unique identification number) in relation to sales
- Artificially created warehouse balances, accumulated unspent (frozen commodity balances), commodity material inventories, etc.
The above-mentioned threats can be prevented, risks reduced and insured by establishing a proper control system. This means the correct delegation of rights and responsibilities, the creation of policies, procedures and work instructions, the establishment of a proper reporting system, regular inventory taking, arranging an operational process for the employees involved, taking into account the specifics of the business, the number and scale of transactions, adapting the job description to the correct operational process, an accurate description of responsibilities and finally, monitoring compliance with the implemented rules. It is recommended that these processes be constantly monitored in order to improve the efficiency of spending time and financial resources.
Inventory is a measure of the efficiency of the developed process and a tool for reducing costs. It is necessary and recommended to develop an inventory policy appropriate to the complexity of the business, which will take into account issues such as:
- Complete inventory of material supplies
- Complete inventory of fixed assets
- ABC analysis, which involves classifying assets by value or other distinguishing characteristics and inventorying them
- Partial inventory, which forms a continuous chain of inventory
- Constant monitoring of negative balances and search for root causes, etc.
Inventory is an important tool for management to have information about the shortcomings in the operational process. The implementation of this control mechanism ensures the prevention of many risks and the reduction of losses, which, first of all, is a natural need for healthy business operations and the establishment of a reasonable margin of error. It is necessary and necessary to limit the maximum amount of loss, determine the acceptable level of loss concentration and other similar and business specifics, set limits – approval and constant monitoring, target results and update limits – review.
It is impossible to completely prevent, insure and/or mitigate all risks, however, modern management, within the framework of equal economic development opportunities, tries its best to use all possible tools for proper business management and make the most practical and result-oriented decisions. All commercial activities are based on profit maximization so that the business maintains and improves the quality of its assets, ensures the continuity of operations, develops its activities and achieves maximum results, ensures the provision of timely, accurate and relevant information to stakeholders, is solvent and correctly determines the amount of taxes in the budget.
Loyalty Loialte is an auditing and consulting company that offers its clients high-quality professional services. For detailed information about the inventory service, please see the link: Inventory
Author: Teimuraz Abelashvili, Loialte Finance, Partner
