Importance of Inventory Management

If you are not adequately managing your inventory or not managing at all, your business will suffer as a result. There are so many benefits of inventory management, which can help both your customer and employees.

Benefits of Inventory Management: –

1. Proper Procurement Planning: –

Excess Purchase requisition & approvals and unnecessary stocking of material not only leads to the problem of limitation of space for essentials items but also leads to blockage of working capital within the company.

Proper budgeting and planning of production by management, can lead to the better allocation of resources for production required for the foreseeable future and as a result, the capital which otherwise would be blocked because of unnecessary purchase can now be used for other activities within the entity.

Financial Implication: –

The reduction in working capital requirement.

2. Meeting the Statutory Requirements: –

As per Company Audit Report Order, 2020 clause (i) and (ii) requires every company to prepare inventory register and conduct physical inventory verification at regular intervals. The frequency of physical verification varies as per the nature of inventory.

For meeting the CARO requirements company should follow the following policies and procedures: –

Organized Warehouse: – Organising Inventory is one of the most important parts of Inventory Management within a company. Internal controls in managing inventory include maintaining racks and bin cards, proper requisition, and issuance notes for inter-department transfer and entry in the inward and outward register, etc.

Financial Implication: –

Adequate internal controls concerning inventory management will help the auditor to check the proper valuation of inventory and reduce the risk of material misstatement for fraud and errors.

(Authentication of valuation of closing stock on part of the auditor is necessary as it involves a high risk of material misstatement.)

3. Location of Inventory –

Company production plants with more departments and locations can suffer when employees need to call each other to find a single piece of inventory or to confirm its presence. Systematically managing your inventory can help to avoid the tracking of inventory at any location. (For Example: – Managing the inventory in the system with department and location wise and Code for location and items are also maintained in the system).

4. Inventory held by Third Party vendors/Job workers

Adequate internal financial controls within the entity with respect to inventory held with the third party include:

A. As per the Goods and Services Act, 2017 any stock item which is sent to a third party or job worker for further processing must be documented properly which includes preparation of delivery challan, an entry in outward register, entry by job worker/third party in the delivery challan which sends stock back to the company.

Any stock held by third-party/ job workers for more than one year will be considered as deemed sale of goods to the party on part of the company, which will lead to the outflow of cash by way of meeting the GST liability.

B. Standardization of normal loss on part of a job work should be made by the company as an internal control for checking the unnecessary wastage of raw materials or stock given to the job worker. 

5. Management of Scarp in relation to inventory

Proper management of scrap includes

  1. A predefined place to stack or place scrap within the company.

      2. A percentage of normal loss must be identified in different production operations of the company and must be linked with the production voucher so that in case of any abnormal wastage, the person in charge can be held responsible.

6. Increase the Employees Efficiency –

Employee efficiency will significantly increase the wealth of the business. Without the efficient management of inventory, the employees of the company will pay more time on other activities like moving goods from one department to another and sending the physical paper and other

sheets from one department to another, and manually write all information and do not have real-time stock quantity at the store department. Instead of wasting money and time on these activities, it can be avoided by proper inventory management. Employees of the company will be happier if they spend more time on necessary tasks, which contributes to company wealth.

7. Achieving All Sale Order: –

Inadequate maintenance of inventory also causes loss of sales. There are many ways things can go wrong, such as when employees assume that an item is out of stock and inform the customer of this, only to discover the item later. Employees may also direct a customer to a certain location to find a specific item, only to discover that the location does not have it. The more accurate your inventory management is, the more customer success you will experience.

This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by: CA Aman Aggarwal

AKGVG & Associates

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