Inventory management is a crucial element in the accounting of any company that deals with physical goods. If you're not familiar with the term: inventories represent the products or materials that a company has for sale or use in production.
Maintaining rigorous and up-to-date control of these assets is essential to ensure the accuracy of financial results and the economic health of the organization.
But how to do that?
And how can we make the most of our inventories in accounting?
Take advantage of this article to discover the latest legislative changes on the subject and find out how to carry out an efficient inventory that takes advantage of the tax opportunities in this area of interest.
What is an Inventory?
Let's start at the beginning. An inventory consists of a detailed list of all the assets a company owns, including:
- Goods for sale;
- Raw materials for production;
- Finished products ready for distribution.
For example, in a bookstore, the inventory would include all the books available on the shelves and in the warehouse, categorized by title, author, quantity and price. Keeping this list up to date helps the company to know what it has in stock and to plan future purchases or sales.
But how does your inventory impact your company's accounting?
What is the Importance of Inventories in Accounting?
Accurate recording of inventories is crucial for accounting: it directly influences the calculation of the cost of goods sold (COGS) and, consequently, the calculation of the company's financial results.
A well-managed inventory allows you to determine gross profit - since subtracting COGS from total sales gives you gross profit.
Warning: if the inventory value is incorrect, this calculation will be inaccurate, affecting the profitability analysis!
In addition, knowing the stock levels helps in the replenishment of products, avoiding shortages or excesses that can lead to financial losses.
And of course...
Effective inventory control is also essential for complying with tax obligations.
In Portugal, companies are obliged to report their inventories to the Tax Authority (AT), according to the legislation in force. Remember that failure to comply can result in penalties!
But for those who have been keeping abreast of inventory legislation and just want to find out about the latest changes: what has changed since the last State Budget?
That's what we're going to find out next.
Recent Legislative Changes on Inventories
Especially since the last State Budget, Portuguese legislation has evolved to strengthen control over companies' inventories. Among other less relevant changes, I would highlight the following:
Inventory valuation waived
- For tax periods beginning on or after January 1, 2024, all taxable persons are exempt from the obligation to report valued inventories;
- For tax periods beginning on or after January 1, 2025, the exemption applies to taxable persons who are not required to keep a permanent inventory.
Deadlines for communicating inventories:
- Companies must communicate their inventory to the Tax Authority (AT) by January 31, 2025.
- For companies with a tax period other than the calendar year, the communication must be made by the end of the month following the end of that period.
Exemption for Simplified Regime:
- Companies operating under the simplified IRS or IRC tax regime are still exempt from reporting and valuing their inventories.
But if this chapter was dedicated to those who were already aware of the legislation and just wanted to know what had changed, there will be many who haven't mastered the recommended practices for efficient inventory management.
- What to do and when?
- How to organize storage and records?
In the next chapter, I'll share with you the 7 recommendations that the accountants in the BTOCNET network repeated the most when I asked them for their opinion on the subject.
How to Conduct an Effective Inventory?
Carrying out an efficient inventory is fundamental to the effective management of a company's resources. A well-executed inventory makes it possible:
- Precise stock control;
- Facilitates strategic decision-making;
- And it ensures compliance with tax obligations.
Follow these 7 tips to achieve that goal:
1. Detailed planning
Before starting the inventory, it is crucial to clearly establish the objectives. Typically, we find things like:
- Identification of discrepancies;
- Sales performance evaluation;
- Preparation for tax audits.
Remember to define a realistic schedule that includes all the stages of the inventory process, from preparation to analysis of the data collected. This time planning helps minimize interruptions to the company's daily operations.
2. Storage Space Organization
Organize products by category, such as:
- Type,
- Size,
- Or expiration date.
This organization makes counting easier and reduces the possibility of errors.
What's more, make sure that all items are clearly identified with labels or barcodes, allowing for faster and more accurate counting.
3. Team formation
Among your employees, choose a responsible and well-trained team to conduct the inventory, ensuring that they understand the importance of the process and the proper counting techniques.
When assigning roles to each of them, clearly define the responsibilities of each team member, such as:
- Counting;
- Data recording;
- Or supervision;
To ensure an efficient workflow!
4. Use of Appropriate Technology
Implement specialized software that allows you to automatically record stock entries and exits, facilitating real-time updates and the generation of accurate reports.
Want to go even further?
Use barcode scanners or RFID devices to speed up the counting process and reduce human error!
5. Counting procedures
Of course, most of the time manual processes don't disappear completely!
Implement a double counting system, where two independent employees count the same set of items and then compare the results to identify discrepancies.
Here you can download a spreadsheet to organize your stock!
6. Data Analysis and Reconciliation
Finally, after counting, compare the data obtained with the existing accounting records to identify and investigate any discrepancies.
Make the necessary adjustments to stock records to accurately reflect physical reality, documenting and justifying all corrections made.
7. Documentation and Reports
Finally, remember to leave reports summarizing the results of the inventory:
- Discrepancies found;
- Corrective action taken;
- And recommendations for future improvements.
Keep an organized record file of all inventory-related documents, including physical counts, adjustments and internal communications, for future reference and legal compliance.
Before we said goodbye:
Shall we review the most common mistakes made in inventory management?
Common Mistakes in Inventory Management and How to Avoid Them
Inventory management is susceptible to a number of errors that can compromise the efficiency and profitability of the business. Identifying and avoiding these errors is essential to maintaining the integrity of inventory processes.
These are the most common mistakes made by our clients:
1. Lack of regular inventory updating
The absence of frequent updates can lead to significant discrepancies between actual stock and accounting records, resulting in inappropriate purchasing decisions and possible stock-outs.
My recommendation? Establish a schedule of cyclical or rotating counts, ensuring that the inventory is updated regularly and accurately reflects the reality of the stock.
2. Neglect of Obsolete or Damaged Products
Keeping obsolete or damaged items in inventory inflates the value of stock and takes up space that could be used for higher turnover products.
Implement periodic review policies to identify and remove obsolete or damaged products, considering options such as:
- Promotions to sell off old stock;
- Or proper recycling.
I talked about it in this video on our Instagram page!
3. Lack of Standardization in Records
The lack of standardization in the nomenclature and coding of products can cause:
- Confusion;
- Duplicate registrations;
- Difficulties in stock management.
Suggestion: develop a standardized coding system and ensure that all employees use it consistently in inventory records.
4. Excessive dependence on manual processes
Manual processes are prone to human error, such as omissions or incorrect records, compromising the accuracy of the inventory. How do you get around this problem?
Adopt automation technologies such as
- Inventory management systems;
- And optical reading devices;
To reduce dependence on manual processes and increase data accuracy!
5. Inadequate integration between departments
The lack of communication and integration between departments, such as:
- Sales;
- Shopping;
- And warehouse;
It can lead to uncoordinated decisions that negatively affect stock control.
Can you imagine if Amazon's various departments didn't communicate with each other every second?
Establish effective communication channels and promote collaboration between departments, ensuring that inventory information is shared and updated in real time.
6. Not Considering Seasonality in Stock Management
Did you know that ignoring seasonal variations in demand can result in overstocking or understocking, affecting sales and customer satisfaction?
Periodically analyze historical sales data to identify seasonal patterns and adjust stock levels according to demand forecasts, ensuring that products are available at the right times.
7. Underestimating the Importance of Technology in Inventory Management
Last but not least: not using appropriate technological tools can lead to inefficient management, with a greater propensity for errors and less ability to respond to market needs.
Invest in modern inventory management systems that offer features such as:
- Real-time tracking;
- Integration with other business platforms;
- And generation of analytical reports to support decision-making.
By recognizing and tackling these mistakes in inventory management, companies can optimize their processes, reduce costs and improve customer satisfaction, ensuring a more efficient and competitive operation in the market.
Remember them if you have an inventory to manage!
Conclusion
Investing in a stock management system ensures a company's financial sustainability and allows it to effectively meet its tax obligations - thus avoiding the possibility of future contingencies with the Tax Authority.
BTOCNET is available to help your company with efficient inventory management and compliance with new regulations, ensuring that your business remains compliant and thrives in today's market.
Get in touch now in case we can help!
