Inventory control is one of the greatest issues in the contracting industry and causes most contractors’ sleepless nights. The loss of inventory or the purchase of unneeded inventory causes costs to go up and profits down. We’ll discuss some great ways to control inventory, but first let’s review the basics of accounting for inventory.
When you purchase inventory from a supplier, you will use cash out of your checking account or receive a bill for payment later (accounts payable). These accounts are on the Balance Sheet. You have decreased an asset (cash) or increased a liability (accounts payable). You must offset this purchase with an asset called Inventory. When you buy inventory, you place the item in Inventory. When you sell it, it moves out of Inventory and goes to Costs of Goods Sold on the Profit and Loss Statement. You do not buy an Inventory item and post it directly to Cost of Goods Sold. It is not Cost of Goods Sold as it has not been sold, only bought. An item stays in Inventory until it is Sold, then moves. To review, everything you buy for resale goes into Inventory. When you sell that item, it moves from Inventory to Costs of Goods Sold. If you follow these rules, then you be able to better track inventory.
You also are required by the IRS to perform a physical inventory each year prior to your tax return filing. You count all inventory items in your warehouse and trucks and assign them a value. Their value can be based on Average Costs, Last Costs (Last In, First Out) or First Costs (First In, First Out). Inventory control is supposed to work the following way. You count Inventory and assign a value to it on January 1st. You add to Inventory all the items you purchased for the month of January. This gives you total Inventory Available. You subtract from this value the Inventory used on jobs (Cost of Goods Sold) to get ending inventory on January 31st. Ending inventory on January 31st becomes beginning inventory on February 1st and the cycle continues. At the end of each month, the Inventory number on the Balance Sheet should reflect what is in Inventory.
Sometime during the year, preferably prior to spring and prior to fall, you count inventory again and compare the counted value to the value on the Balance Sheet. Any discrepancies are called Inventory Adjustments or Unapplied Materials on the Profit/Loss and every contractor has some. The numbers will never match, because what we buy and what we use is difficult to control. We depend on too many people to give us the right information.
Here is a fresh approach to controlling inventory from the truck to the warehouse. Contractors typically have only two methods to stock inventory—they either purchase inventory from a supplier and stock their warehouse or stock trucks directly from a supplier. Trying to manage inventory with either of these methods is costly and typically does not work. If you have field personnel stocking trucks directly from the warehouse or supply house, you cannot control inventory. The more people that are involved in the inventory process, the greater the chances for mistakes and the more difficult time you will have.
You will never control inventory if you allow your field persons to access your warehouse or purchase items at will at the supply house. Lock the warehouse and stop the unnecessary trips to the supply house. Think about the approach below.
First, start with a complete inventory of the service or install truck. Take everything out of the vehicle down to bare metal. Everything on the dash, everything in the glove box or banded to the sun visors, everything in the truck, EVERYTHING. Then compose a list of the most critical items needed in each truck for service or install work. Let’s say we stock the truck with 200 items. After each service call or install job, the field person is de-briefed by the dispatcher. The field person would tell the dispatcher what items were used on the job and the dispatcher would collect this list of inventory used off the truck as the day progresses.
At the end of the day, the dispatcher will fax the list to a supplier to restock the truck or the list will be pulled from warehouse inventory. You can then send the tech to the supply house to pick up the list, schedule him/her back to the office for restocking, or send a parts runner (retired person) to their truck to pick up invoices and restock the truck. If they have invoiced the customer for 5 items, they receive 5 items.
Don’t try to control inventory at the warehouse level as you will not succeed. First control inventory at the truck level. You will have less parts to control and also only one person or team will be responsible. After you have restocked trucks according to what they use off the truck, then manage your warehouse inventory. Try to stock trucks from your warehouse by having the supply house restock your inventory. By counting how many inventory items you use, you can buy in quantity, choose floor planning and save money.
New technology which involves wireless communication allows the office and technician to work seamlessly. Inventory control is immediate with the parts being relayed directly to a supply house or office for restocking. Regardless of what methods you choose, you need to control inventory to see if you really made money on the jobs you sold.
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