An Effective Stocktaking for SMEs

For the companies which handle inventories, such as manufacturing company, trading company or even some R&D companies, inventory management is one of important internal control procedures for smooth operating.

The inventories management is composed of several sub control procedures such as stock-in and out, daily goods guard, stocktaking and inventory booking and reporting. Among these, stocktaking probably is the most unavoidable and complex one procedure.

We all know that the implementation of control procedures needs input of manpower and cash. For SMEs, it is commonly known that limited human resource and capital cannot guarantee that all control points are covered. Today, we would like to discuss certain key points SMEs may consider for an effective stocktaking.

1. Who shall count the goods this time?

Many SMEs just designate one employee to process all inventories sub procedures. This staff will alone count the goods and booking. And no review position is set up to monitor his or her work.

Since stock keeper is very familiar with the inventories, the place of storage as well as the booking, arranging one staff to count and check book may lead risk that the stock keeper may not seriously perform the stocktaking each time. If so, fraud behaviors such as hiding the stock loss or difference or generating fake inventory record may incur.

One way to remediate the above risks is to designate the employee from other functional department who does not involve in inventory management to timely count the goods and check the inventory booking independently. In this way, a monitoring control measure is added to the counting and this would help reduce the fraud behaviors. The frequency of such monitoring arrangement, i.e. how often shall an independent count shall be conducted, could be judged by the management of the company based on the significance of the inventories among total assets and the overall risk toleration level of the company .

2. Are these all goods we have?

Some SMEs have no one specialized warehouse to store the goods, but may place the goods dispersedly in the office such as the corner of stairs, or the tea room. Under such situation, other than the safety of the goods concern, for counting procedure alone, whether all goods in the company are counted shall be a key issue to consider.

For the above issue, firstly and importantly, the area for goods storage shall be fixed and numbered and marked with a distinct label. For example, if the corner of the tea house is chosen as No.1 goods storage place. This place shall be marked clearly about the boundary and number of storage place. Secondly, the stock keeper shall book clearly in the inventory record the place of storage for each goods. Thirdly, instead of just finding the goods to count according to the inventory record, the counter shall walk through all storage places numbered during counting. Finally, of course, when the quantity of goods increases to a certain level, finding one large space to centralize the goods storage is the top task.

3. Have we already counted this one?

Due to limited manpower for stocktaking, SMEs may have only one team to count goods which may be placed in several areas. Under this situation, planning an order of counting and designing a road trip map in advance can largely help increase the efficiency of counting and avoid duplication.

Other than the road map, another good measure to avoid duplication and missing in counting is to put a tag on goods counted. After the counting, the counter would be better to walk through the road of counting again to check whether all inventories which shall be counted are tagged.

4. Counting is not all?

The purpose of stocktaking is to obtain the information about the assets the Company actually holds. And the ultimate purpose is to serve the target of the whole business. The counting is definitely not the last step of stocktaking. The counting result shall be transferred to the information which could be used by the management of the company. Therefore, the important step after counting is to check whether the inventory record and financial report reflect accurately the value of physical inventories the company actually holds. The method is to compare the physical stocktaking result with the inventory record and make treatment on the difference if any.

In practice, we noted that many SMEs only compare the stocktaking result with the record maintained by the warehouse, but not with accounting system. Since the financial report to the management for decision making or to the government for supervision is generated from the accounting system, the accounting record is the basis for the financial report. Without checking the accounting record, the financial report might be wrong in inventory disclosure and the company might be exposed to operation risk.

5. External contractor as warehouse

Many SMEs contract a third party for inventory storage and stock-in and out. Since SMEs management still holds the responsibility of generating correct financial reporting, SMEs shall not just rely on the report from the contractor, but still shall maintain an inventory record by itself and timely count the goods in the contractor’s warehouse. The following steps could be considered:

1) Checking the inventory report from the third party warehouse timely with the company’s stock movement document one by one and promptly resolve the difference if any;
2) Visiting the warehouse to conduct stocktaking timely:
a) Obtain the information from the third party warehouse about the area of the storage, the coding system of the storage shelves and design the road trip plan for the stocktaking.
b) Identify the responsibility of the third party warehouse in the stocktaking with respect of work allocation between the contractor and the company;
c) Check not just quantity, but also the condition of the goods, e.g. the quality of the goods; and make note on count sheet during stocktaking; and
d) Signature from the storage staff from the third party warehouse shall be required on the count sheet each time.

Please note that other than the above points, regarding the stocktaking arrangement, there are a lot of other points and the implementation of which would help improve the effectiveness and efficiency of the stocktaking. For example, the count sheet shall be sequentially numbered and used.

If you are interested in other arrangements, or need assistance on stocktaking arrangement or have risk concerns to resolve, please contact us.

Please note that the article only represents the opinion of the writer. Regarding the implementation of the tax treatment, the consultation with the local in-charge tax authority is required.