Principles of effective stocktaking and stock control, By Bolutife Oluwadele

…to guide against keeping fictitious stocks in the book, simple stock control methods can be deployed by even the smallest businesses. More importantly, each business should endeavour to establish a stocktaking system that may be suitable for it. No business should leave the management of its stocks to chance or to pilfering fingers.

The advancement in technology has brought a lot of innovations and evolutions into the management of stocks (inventories). Advanced supply chains management and the Just in Time (JIT) are some of the glaring benefits that have been derived. Despite the ubiquitous globalisation, these advancements are not equally enjoyed around the globe. For instance, JIT can only thrive where logistics and communications are top-notch. Also, where many inputs for production processes are import-dependent, it becomes practically impossible to jettison the old ways of stock controls, one of which is the periodic or annual stock taking. In particular, retail outlets and many SMEs who may not have the wherewithal to invest in technologically-driven stock management, which may enhance real-time online record keeping, may have no choice but to go the traditional way. Besides the above, there may be the need always to reconcile what is in the book with what is on the ground. Such exercises become imperative in an atmosphere of pilferage and other corruptible practices.

Stocktaking is the process whereby the value of the stock of materials is assessed at a given period for inclusion in the accounts. As stock valuation forms an essential element in the performance evaluation of an enterprise (profit measurement), its process must be effective.

Stocktaking could be annual or continuous. If it is carried out once in a year, i.e., the end of the financial year, that is called annual stocktaking; however, if it is called periodic or continuous stocktaking, it is carried out periodically.

In practice, the following must be in place to ensure proper and effective stock taking.

(a.) The stock should be planned well in advance, and systemically performed by those who can identify stock items but are not ordinarily in charge of stockkeeping or movement;

(b.) The stock should be clearly and neatly arranged ( preferably in sections) to facilitate control over the counting procedure. Movement of stocks should be suspended where possible, or in the alternative (where it is impracticable to suspend stock movement), it should be strictly controlled and monitored by labels or other physical means;

 (c.) Adequate arrangements should be made to ensure proper cut-off. Dispatch documents should be provided for all goods dispatched prior to stocktaking and for goods in hand for which the titles have passed to clients. Those classes of stock should not be included in the stock to ensure that sales and purchases are correctly recorded and classified for the intervening period. Goods in transit to and from the stores at the stocktaking should also be correctly dealt with in the records;

(d.) Proper arrangements should be made to ensure that slow-moving, obsolete, scrapped, defective, shop soiled, and damaged stocks are identified in advance and correctly classified;

(e.) Pre-printed inventory sheets with a unique numbering series should be adopted on which detailed descriptions of stock items are provided. Count supervisors should initial the sheet before and after counting, and they should be controlled to ensure that all count sheets are accounted for at the end of the exercise.

Perpetual Inventory

This method involves knowing stock levels of all items at all times. A record is kept of all items showing receipts issues and balances of stock. Since in practice, physical stocks may not agree with the recorded stock  (due to clerical errors, storekeepers’ errors, pilferage, etc.). It is necessary to cheque the inventory by continuous stocktaking. Here several items are counted and checked daily or at frequent intervals and compared with the bin cards of records.

Perpetual inventory or continuous stocktaking involves the upkeep of two sets of records:

(i.) Bin Cards: These show the physical balance of units in stock at any time;

(ii.) Stores Ledger Records: These show their valuation at any time.

The physical balances on bin cards and the stores ledger records should agree at all times unless there have been clerical errors in the records.

Where there are discrepancies in the two sets of records, corrections are made by:

(a.) Rectifying clerical errors on the records.

(b.) If the discrepancies occur because stock units appear to be missing, the lost stock must be written off (or the extra units added back to the store records). The accounting transaction will be reported by store credit notes, where stock items have been lost, and debit notes should be installed when more actual stock is recorded.

Avantages of Continuous Stocktaking 

• A physical check for annual stocktaking is necessary because of continuous stocktaking;
• The disruption caused by annual stocktaking is avoided because of continuous stocktaking;
• More time is available, thereby reducing errors and allowing for an investigation;
• Deficiencies and losses are revealed sooner than they would be if stocktaking is limited to an annual check;
• Production holds up are eliminated because the store staff is so busy as to be unable to deal with material issues to the production department;
• Staff morale is increased, and standards raised.

Stock Control

The total cost of having stock may be significant, in relation to the cost of the materials themselves, or they may be relatively small.

The EOQ model is usually applied to these items of stocks, where the cost of having stock is probably high, i.e., expensive items, probably with high ordering costs and high-interest charges of stock-holding.

Material items may be classified as expensive, inexpensive, or middle cost. Because of the practical advantages of simplifying store control procedures without incurring unnecessarily excessive costs, it may be possible to segregate materials for selective stores control, i.e.

(1) Expensive and medium costs materials are subject to careful stores control procedures to minimise costs.

(2) Inexpensive materials can be stored in large quantities with a slow turnover period because the cost savings from careful store control do not justify the administrative efforts required to implement the control.

 This selective approach to stores control is sometimes called the A, B, C method (whereby materials are classified A, B, or C, according to their expense).

Order Cycling

Under this method, quantities on hand of each store item are reviewed periodically (every 1, 2, 3 months). For low-cost items, a technique called the 90.60.30 days technique could be used so that when stocks fall to 60 days’ supply, a fresh order is placed for a 30 days’ supply to boost stocks to 90 days’ supply. For high-cost items, a most stringent stores control procedure is advisable to keep down stock holding costs.

Two Bin System

This system of stores control is one whereby each stores item is kept in two storage bins. When the first bin is emptied, an order must be placed for a new supply; the second bin will contain sufficient quantities to last until the fresh delivery is received.

Therefore, to guide against keeping fictitious stocks in the book, simple stock control methods can be deployed by even the smallest businesses. More importantly, each business should endeavour to establish a stocktaking system that may be suitable for it. No business should leave the management of its stocks to chance or to pilfering fingers.

Bolutife Oluwadele, a chartered accountant and a public policy and administration scholar, writes from Canada. He is the author of Thoughts of A Village Boy and can be reached through: [email protected]