We’re excited to feature Mike Bachara from Pro Count West as a guest educator on our blog! Mike’s insights into annual physical inventory reviews are a huge value for any parts department. To learn more about Mike and his impressive resume, click here. Enjoy!
It’s that time of year again – time to prepare for your annual physical inventory.
As the second largest investment in most automotive dealerships, it is imperative that your parts inventory dollars be accounted for. If you do not take this critical step in your inventory management, there is a risk that your ending inventory will be inaccurately stated.
If overstated, your ending inventory will have a negative effect on your taxable, resulting in a higher tax payable. While an understated ending inventory will have the reverse effect (a decreased tax payable), you will not be in compliance with the IRS, risking penalties and additional tax owing.
To ensure your final inventory count is as accurate as possible, it is important to be aware of potential errors and to take the necessary steps to prevent them. Here are six common errors for automotive dealerships’ year-end inventory count.
1. Incorrect unit measure
An incorrect unit measure error occurs when the unit of measure in the inventory management system differs from the unit used during the physical count. Hose, wire and similar parts are a major culprit for this type of error – you counted in inches, but the inventory system uses feet. Bulk fluids can also cause incorrect unit measure errors.
Ensuring that you refer to the unit used in the inventory management system before counting each part will help eliminate this error.
2. Incorrect part number
An incorrect part number error occurs when you count a part, assuming it has a different part number than it really does. The resulting error will affect two parts – the part you thought it was will have a higher count and the part it is will have a lower count.
This error can be prevented through effectively organizing your parts prior to counting (i.e. organize your bins and properly label parts) as well as ensuring the numbers are verified on each piece before counting.
3. Prepaid or pre-billed parts
Counting prepaid or pre-billed parts during a physical inventory will result in an overage in the amount of those parts. Make sure to exclude the parts these parts by making sure to label those parts as “do not inventory, or DNI” prior to counting.
4. Consignment inventory
This error occurs when counters accidentally count consignment inventory. This error occurs less frequently within the parts department, but your team should be aware of it. As with the previous error, if you do stock consignment inventory, mark it as DNI to avoid confusion.
5. Improper cut-off
An improper cut-off error occurs when new inventory is counted as part of the physical count, but the invoice was not yet entered into the system. Upon reconciling the physical count with the quantity in the system, it will appear you are short. Once the adjustment is made and the invoice is entered, you will be over by the same amount you made the adjustment for.
To ensure this error does not occur, properly mark and exclude unentered inventory from the count.
6. WIP parts
A WIP error occurs when parts are currently being installed on a vehicle but have not been counted or they have not been associated with a job in the accounting system. This usually indicates a process error within the parts department and can cause inventory discrepancies.
To avoid this error, be sure that open work orders with parts that have not been entered in the system are counted during the physical inventory.
For more information on potential errors and how to avoid them, contact the Pro Count West team of professionals today.