Inventory reconciliation: what it is, how to do it and the benefits of automation

Inventory reconciliation: what it is, how to do it and the benefits of automation

In addition, what are the common mistakes in this key process for companies and businesses?

Table of Contents:

The availability of validated information is vital for companies, in the strict sense of the term: certainty in data determines business success.

On the other hand, errors in the bases translate into obstacles and losses in profitability. Inventory reconciliation is key to businesses in various sectors, in order to accurately control purchases and sales.

In this Conciliac blog post we will review the details of the process, concluding on a crucial aspect: the convenience of automation.

What is inventory reconciliation and what is it for?

It is the process applied to check if the physical inventory and the accounting record of a company are congruent or if, on the contrary, there are inconsistencies.

The purpose of the inventory reconciliation is to verify that the data on inventories match the products on hand. In other words, the purpose is to examine the consistency between the information (intangible) and the material (tangible). In turn, it is necessary to cross-check this information with the company’s accounting balances.

To deepen the understanding of this practice, let’s look at an example of inventory reconciliation:

If we take a service station or gas station as a sample; this process maps the concordance between the fuel in the tanks and the amount that was sold at the pumps.

If there is an inconsistency, it will be imperative to examine the causes (operational errors, tank leaks, lack of records, etc.) and address possible solutions.

In summary, inventory reconciliation serves to:

  • Identify losses and depreciation of (physical) assets.
  • Be aware of obsolete assets in stock and inventories.
  • Explain with data the reality of your assets.
  • Make better decisions based on information that must be validated.
  • By reconciling inventories, you comply with legal regulations that require record keeping.

5 tips for inventory reconciliation

  • As a first step, it is relevant to make an analysis of the company’s assets.
  • A good idea is to take advantage of the benefits of tools such as product labeling, useful for identifying physical goods in storage centers.
  • It is essential to choose an efficient method for measuring inventory on hand. As mentioned later in this review, automated reconciliation software brings agility, reliability and security to this necessary process.
  • This practice should not be restricted to a count of physical assets: it should also be validated in relation to the company’s accounting records.
  • It is advisable to engage specialists, so that the processes are carried out efficiently and take advantage of the best solutions available on the market.

Inventory reconciliation: the most common errors

A basic mistake in these processes is to undervalue results that reflect inconsistencies. For example, as we noted earlier in this blog, it is not acceptable to declare a higher amount than what corresponds to the actual stock.

Keep in mind that inaccurate inventories can lead to problems in audits and inspections.

Another mistake in reconciliation is to space this practice too much. Although it is usual to do it at the end of each year, it is advisable to do it on a quarterly or even monthly basis in order to react as soon as possible to possible inconsistencies in the inventory.

A common mistake in inventory control is to assume that it is merely a count of the stock on hand. As mentioned above, it is important to cross-check the information with other data, such as the company’s financial statements or the condition of assets.

In this sense, the reconciliation should not be approached in isolation, but with a panoramic view, especially in companies with many locations.

Another aspect to keep in mind. While reconciliation processes are particularly important in large organizations to prevent inconsistencies from negatively affecting activities, this practice is recommended (and also necessary) in small and medium-sized companies in various sectors and industries.

Moreover, in the era of digitalization, another misconception is linked to the method of measuring inventory on hand. By this we mean that to despise the power of automated systems is, quite simply, to choose the thorniest path instead of opting for efficiency.

The benefits of automating reconciliation

Digital marketing specialists repeat, like a mantra, that “what cannot be measured cannot be improved”. Based on our experience in automated reconciliation, we add that in order for there to be such an improvement, the data analyzed must be accurate and validated.

What is meant by reconciliation? In general and summarized terms, it is about corroborating the accuracy of the available information. It applies not only to inventories, but also to bank accounts, credit card transactions, and so on.

When we ask ourselves how to perform the accounting reconciliation, two main ways open up: the manual process and the automated one.

It is possible to perform an inventory reconciliation in Excel and even with a calculator in hand, to check if there are shortages or surpluses in the products. These methodologies have a number of disadvantages, which should be avoided.

  • They are fallible, prone to error.
  • The manual process is tedious.
  • Because it is cumbersome, many companies choose to space out reconciliations over long periods, which usually results in obstacles to growth.
  • Going down a lateral path to digitization wastes valuable resources, such as labor time and money.
  • Meanwhile, the manual option leads to a decline in work performance and profits.

The automation of reconciliation brings speed to the process and provides a true picture of the data, in this case of a company’s physical assets and their relationship to the accounting records.

Ultimately, why choose to review the information manually, given the many drawbacks of this technique, starting with its complexity and inaccurate results?

You can avoid manual reconciliation with automation, which is both efficient and productivity-enhancing. Solutions such as Conciliac EDM help to make the procedure really profitable, so that your company grows, through clear and simple reports, in a centralized platform.