The complexities of being an inventory entrepreneur begin with just that - the inventory. This is why it is imperative this type of business understands, logs, manages and accounts for each step of the raw material-to-finished-product process in order to intelligently plan for and maximize profit margins. Accountfully’s Inventory Workbook and its in depth analysis make us an industry leader in the inventory entrepreneur space.
This is because through this process, we understand your entire supply chain and all of the touch points from raw material to finished product. This is a meticulous, templated process in which Accountfully gets to know each new inventory based client during the onboarding phase.
The Inventory Workbook serves as the main management document for the business’s products and encompasses items such as vendors, manufacturers, raw materials, costs of goods sold, overall process map, and more. Let’s dive into what this workbook offers, what it logs and how it will start the process of streamlining business processes as it serves as the basis for all things inventory.
The Inventory Evaluation and Supply Chain Discovery Process
To improve upon something, it is best to understand it first. We start with an in depth discovery of your products and the supply chain. This is where we can begin to organize and piece together each step of the way and each cost involved in the product’s formation. Questions are answered here like, which inventory account does an item hit?, how much does this packaging cost to source, and where is it sourced? We will develop the intricate list of bill materials, where all of the raw items laid out, and at hand are accounted for. Here the assembly process begins to unfold and be tracked.
We get to know any of your 3PL’s (aka logistics services), co-packers, and understand your sales channels. Do you sell through Amazon or other online channels? Any dealers and/or distributors at play? Where is all of your inventory physically located and stored? Is there inventory there right now? How about the terms of any sales or upfront costs? Perhaps there are costs associated with storing inventory at certain locations. This is a rigorous, in depth, yet essential process that will begin the layout of the Inventory Workbook.
Here, some of the basic fees and costs associated with each item will be laid out: raw materials, outflows related to freight, taxes, duties, co packing fees, in-house labor on W2 payroll, packaging, labels, all of the items purchased in the process of becoming the end product.
The Business Process Lives Here
Once we have pieced together all of the data in our discovery, it can start to be organized in the Workbook. We not only learn your products, but learn your contacts and stakeholders; manufacturers, vendors, etc.. These contacts and their information live inside their own section of the workbook in the contact list - all on premise and off premise involved in each product. Along the way, we identify the costs associated with each step and start the assessment of this process. The various calculations and costs are linked throughout the pages of the workbook, so that it provides an accurate and dynamic view of each item as cost change. Don’t worry, if numbers and spreadsheets are not your thing, we have you covered. This data is also inputted into a workflow map that shows the entire process visually. This helps the less number - centric business owner picture and understand how the process flows (more details on that later).
The Product List
Some clients will be more complicated than others, depending on how complex their supply chain is and the number of finished goods sold. Some of our clients pay for a finished good at one cost, then resell with a markup - a much less complex scenario. For most of our inventory based clients, however, there's a lot of products at hand and multiple raw materials that each product stems from. Whether it is one or one hundred, we have each product listed out for reference alongside their basic stats. Each product SKU, type, and basic identifying information, i.e, finished-good unit of measure, location where each sits, and raw material cost(s) are at the ready.
Cost of Goods Sold - What Are the Actual Numbers
As we better understand and map out the complex process in which raw material turns into finished goods, we never neglect the meaning of the costs associated with each step. This is where the true analysis comes into play. As each step of the process adds another dollar sign (or few), the profit margin decreases in conjunction with these steps. Until you can pinpoint where items may have an opportunity to become less costly, or end products that need a new pricing structure, you aren’t truly on top of your COGS, aka Cost of Goods Sold. When each step of the way is mapped out and assigned a value, it is much easier to identify areas of improvement and areas currently performing well. Here is where we can gather the information and do a gross profit analysis.
Fluctuations or predictions surrounding finished good unit cost is easy to see once each step is assigned its cost. Since the numbers and steps are all linked together through the workbook, it is easy to adjust pricing along the way to see how it affects the end product cost. Imagine being able to identify the exact areas to focus your efforts toward reducing costs, to enable a wider margin.
Inventory Value - the True Cost of What’s Sitting in a Warehouse
The smaller company doesn’t necessarily have multiple warehouses at the same time, but it is still important to understand the value of your inventory as it sits or travels at any given time. It is also valuable to understand the costs associated with freight in and freight out, i.e., when your product leaves the manufacturer and arrives to you, as well as when it leaves you to go to its next destination. Once it reaches its destination, there are more factors involved there as well.
Depending on sales channels, you may forget that those 200 units sitting at Amazon are still an asset. You are most likely sending out samples of your product too, which also needs to be accounted for. This may range from having a few products hanging around the office to use, to items sent out for product reviews, social media influencers, friends and clients. So yes, those awesome product samples that we love to get from our clients, those are included in our workbook.
At the end of the day, inventory has a value and it is a major player in your business’s value, overall. Best case scenario, you don’t have much sitting for too long, but before it becomes a sale, it still needs to be understood and reported each month.
The other caveat is that you will need to have an understanding of your inventory’s value at a) all life cycles within the raw material to product phase, and b) an up to date inventory value at the end of the month as part of your month end financial reporting. We can provide you with both of these, by keeping track of the items as they sit, sell and develop into finished goods. An additional calculation is applied and associated with inventory moving to a new location before a sale.
Where Your Inventory Sits Affects Your Taxes
In addition to understanding inventory’s value as it sits (or moves to sit somewhere else), one of the major benefits of tracking inventory location is understanding its associated tax implications. After we locate and log where your inventory is, we can easily reference this information when it comes time to file the appropriate state sales taxes. Understanding the cost of selling from a certain location can also help influence where you should best focus your efforts. There may be significant cost changes when selling from one state to another. Since we have all of this information handy and offer tax services, it is easily transitioned to our tax filing process, as needed.
The Workflow Map Makes it all Make Sense
We alluded to this portion of the workbook above. At the end of the day, numbers will tell us everything, but sometimes it really helps to visualize what is going on to truly understand it. Accountfully can translate the complexities for the client. This is why there is a workflow map included in the workbook that lays out the entire process of raw material to each finished good, visually. In one clean view, you will see where you buy from, freight in and freight out, at which points, an overview of all your sales channels, warehouses and more. This is the ultimate resource for the more high level business thinker. Similar to diving into the numbers associated with each step, seeing how things are organized visually will also pinpoint areas of improvement.
Easier Integration with Modern Programs
Many of our inventory entrepreneurs with complex inventory needs use DEAR Inventory. This is a cloud based program that manages most of these aspects we are describing in the workbook. So why do both? The assessment of the product life cycle is going to take place whether or not the client ultimately uses DEAR Inventory software. Even if we don’t use DEAR, we leverage the data from the workbook to manage inventory in a more manual manner via spreadsheets and Quickbooks Online.
When it comes time to implement DEAR, having all of this information laid out in a simple to understand fashion, means it will be phenomenally easier to enter all of the required details into the system.
A Proprietary Workbook Essential to the Inventory Entrepreneur
At the end of the day, by diving in to all of the intricate details of an inventory entrepreneur’s supply chain and product process, we are providing two important deliverables to the client:
1) a complete and detailed understanding of their inventory and cost of goods sold (COGS) and
2) the basic foundation from which to streamline the process and improve its efficiency, which ultimately translates into cost savings.
Clients will enjoy a true understanding of what it takes to create their products and the updated and accurate value of their inventory at hand and reported monthly. By having all stakeholders, customers, vendors and contacts in one place, the Accountfully team will be able to do their jobs much more efficiently by being empowered with the information. They will know who to call, where to assign purchases and sales, as well as the terms associated with any purchase or sales agreements.
For the most accurate look into your inventory based operation, having this dynamic and helpful Inventory Workbook will be the foundation for scaling your business properly and truly understanding your costs of goods sold.
This is just one of the many tools, processes and methods Accountfully leverages for client success when they outsource their accounting. If you are an inventory entrepreneur ready to dive into the true value of your products, we want to help. Tell us about your business and let's talk more.