Author: TRANQUIL

GMROI or gross margin return on investment is a ratio that assesses the profitability of inventory.

It fundamentally studies the ability of a company to convert inventory into money for an amount over the inventory cost.

It is mainly used by retail businesses; the calculation in itself is a simple one, and the ratio is useful as it gives visibility into the average inventory returns over its cost.

It is therefore also known as the gross margin return on inventory investment.

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What Do We Mean By the Gross Margin Return on Investment?

We have already seen that the GMROI helps the business owner or investor to understand what is the average sum over its cost that is returned by the inventory.

A ratio below one means that the business is selling products for less than what they spent to purchase it; if it is above one, it means that the firm is selling the products at a price that is above the acquisition cost.

It means that the firm has balanced inventory cost, margin, and sales effectively.

Some industry experts opine that a ratio of a minimum of 3.2 is required for covering all the costs related to labor and occupancy, as well as the profit are met.

ALSO READ: What is Dropshipping and it’s Benefits?

How Can You Arrive at the Gross Margin Return on Investment?

There are various approaches to measuring of the gross margin return on inventory investment, depending on the unique accounting systems of various businesses.

Retail firms incur different types of expenses every month like storage, rent/lease payments, transportation, labor, marketing, utilities, and so on.

More or less, the formula is similar, with only the specific expenses considered being different, based on the goals of individual businesses.

Put in its simplest form, the formula is: Gross Margin/Average Cost of Inventory = GMROI.

For the purposes of internal accounting, retailers may use their own version of this formula, to get different figures.

ALSO READ: Detailed Guide on Budget Variance Analysis

Let us say that a retailer wants to calculate this margin as a percentage, using this formula:

First, from the Revenue, the Cost of Goods Sold is subtracted.

This figure is divided by Revenue in the next step and multiplied by 100.

[(Revenue – Cost of Goods Sold) / Revenue] *100 = Gross Margin percentage.

Eventually, the exact formula depends on several variables, mainly, the internal accounting system of each company.

This number can be presented in monetary value terms – like SAR, a percentage, or a ratio; however, its purpose stays the same – that is, measuring how profitable is your investment in inventory.

It is important to calculate two key metrics: average inventory and gross margin.

When you deduct the cost of goods sold from a company’s revenue, you get the gross profit.

This is then divided by the revenue, as we have seen above.

To calculate the average inventory across a specific period, you total the closing inventory for that specific time period, and divide it by how may periods were there periods in it.

You also have to consider the situation of obsolete inventory.

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How is the Gross Margin Return on Investment Used?

Let us try and understand this with the help of an example:

Suppose retailer A has an annual income of SAR 100 million, and their cost of goods sold is SAR 40 million when the financial year ends.

This means that the company’s gross margin is at 60%, meaning, it retains 0.6 Riyals for every Riyal.

If we state the gross margin in terms of SAR: let us assume that the average inventory cost for the company at the financial year end is SAR 15 million.

Then the firm’s gross margin return on investment is SAR 60 million/15 million = 4.

That translates into 400% of expenses, this means, retailer A sells their goods for a markup of a minimum of SAR 4 for every Riyal invested in inventory.

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Let’s look at their competitor, Retailer Z. With a total income of SAR 100 million, their cost of goods sold is 80 million.

Their gross margin is SAR 20 million, meaning they retain 0.2 Riyals for every Riyal spent on inventory.

Assuming their average cost of inventory is 25 million, their GMROI is SAR 20 million/SAR 25 million.

This means it earns about 80% of its expenses or is getting a margin of 0.8 Riyals for every Riyal spent on inventory.

Now when we compare, we see that Retailer Z is only making 0.8 Riyal per Riyal spent, and that is in no way sufficient to meet marketing, administrative, wages, and other expenses of the business.

Retailer A on the other hand is doing a much better job.

If I were to invest my money, I would do that in the business of Retailer A.

ALSO READ: What is Landed Cost and How to Calculate It?

Why is GMROI Useful?

The gross margin return on inventory investment ratio is useful in many ways:

• Firstly, it helps you see if you are making a profit on your inventory
• It can help you detect inventory issues that are preventing you from making bigger profits
• Many retailers often have inventory that costs them money without earning them revenues, and it hampers your profitability that you get from other sales. The GMROI helps you make better inventory decisions.
• You can invest in products that sell well and earn you a good profit rather than wasting money on products that do not.

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What is a Good GMROI in Retail?

A GMROI over SAR 1 does show that you are indeed making profits on the inventory; however, it may not be sufficient to cover your entire business expenses.

A low GMROI even though it’s positive, may still be indicative of poor business performance.

That begs the question, what exactly is a good ratio of GMROI for retail businesses?

Well this is not an easy question to answer as each business in the retail industry is unique, and the average GMROI can differ depending on the type of retail business you are in.

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For example, a mobile dealer and a greengrocer are likely to have very different ‘good’ GMROIs.

Similarly, the market segment – luxury or economy – also matters.

Retailers who have large sales volumes usually have smaller margins as they need excess inventory for their operations.

SKUs with large stock turn normally have low margins.

On the other hand, high-end items with high margins move slowly and contribute to a slightly lower GMROI overall.

So, for some retailers SAR 2 may be indicative of a healthy business; for some, this may be too low and for some, it may be unattainable.

Eventually, how good a GMROI a retailer attains, completely rests on the degree of control a retailer exercises over expenses and prices.

Ergo, retailers who deal with vendors that dictate costs, or those doing business in very competitive markets are likely to have a lower GMROI.

Retailers who deal with specialty products, make their own products, or are more vertically integrated, are likely to have a higher GMROI.

Similarly, high-end brands will have a higher GMROI than discount ones, as the ratio depends significantly on the market position enjoyed by the business.

To know what is a good GMROI for you, compare your business to similar businesses – in the same vertical and category.

ALSO READ:  Top Inventory Reduction Strategies 

How Can You Increase the Gross Margin Return on Inventory Investment?

To do this, you need to take a series of actions; remember that these actions make up a general approach toward GMROI, no matter which industry you are in.

Experts tell us that the following stages are critical:

1. Better Forecast Accuracy

We have seen that if something is not right about your inventory investment, you are likely to have low GMROI.

It means that you are purchasing more stock than what you sell.

If you improve your sales or demand forecasting, you will be able to make better inventory decisions in terms of purchase.

Knowing how much to buy to maximize sales will automatically increase your GMROI.

2. Optimize Pricing

While the GMROI is inextricably connected to the unit price, merely increasing it will not necessarily increase your GMROI.

In fact, the price rise may be followed by a dip in sales.

What you need to do is optimize prices so that they remain competitive (unless you are selling a high-end, exclusive product) and don’t experience a decrease in sales.

This strategy of optimizing prices will help you to boost your GMROI.

ALSO READ: Complete Guide on Economic Order Quantity (EOQ) 

3. Reducing Inventory Costs

You need to have smart, innovative strategies on inventory.

With customers becoming more discerning and tech-savvy, they demand more flexible pricing choices, and cutting inventor costs in time can help enhance the GMROI significantly.

Storing inventory units cost-effectively is a key aspect in boosting GMROI.

ALSO READ: Sales Order vs Purchase Order

4. Gross Margin Return on Investment Tree

We have seen that the GMROI is a ratio of inventory profitability that tells us how quickly or efficiently an organization can convert its inventory into cash.

This value is applicable mostly to businesses that rely on stocks heavily for their business – chiefly, the retail industry.

It is the most apt for GMROI consideration.

The GMROI tree for retail has many important features.

• As excessive inventory is needed, there is a deep association between high sales volumes and small margins.
• Larger the stock, the lower your margins will be

ALSO READ: Benefits of Goods Received Note (GRN)

The GMROI is a valuable tool for retailers to know how efficient their inventory strategy is.

All you need to do is calculate the gross margin and the cost of inventory.

Optimize prices, reduce inventory costs, and improve your forecast precision, and you’ll achieve a higher GMROI.

Sounds like a tall order? Doing all of this manually can be cumbersome and time-consuming, after all.

Efficient inventory management is critical for any business, and for retailers, it is absolutely crucial.

Manually doing all of this can be exhausting; you may also have more errors, and tie up your employees for long periods.

Switch to a robust, cloud-based ERP like Tranquil to automate and streamline your inventory management process with its feature-packed Inventory Management module.

Maintain optimal stocks of inventory, enjoy continuous sales, reduce costs, maximize profitability, and achieve business growth.

ALSO READ: How to Manage Backordering?

If you’re not sure how Tranquil ERP can benefit your business, do book a demo at a time of your convenience. Our team will be at hand to explain everything and answer all your queries.

Before delving into budget variance analysis, let’s understand what business budgeting is all about.

For a business, budgeting means the process of creating and managing a financial document that contains the estimated earnings and expenses for a period, usually one year.

It is an important activity that helps businesses ensure that departments and employees have the requisite resources to carry out initiatives and achieve goals.

The money left over after subtracting expenses from the projected income is assigned to projects.

Previous budgets can be compared with actual allocation and performance to get a clear picture of how close the forecasts were to actual expenses.

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If the budget overshoots, you need to find out the reason – whether the allocation itself was incorrect, or the project was executed inefficiently.

These insights can be used to improve the process the next time.

There are different types of budgeting that prioritize different factors, and each company has to select the one that suits its unique requirements.

• Zero-based budgeting, where each item is at zero monetary value at the beginning of the period
• Static or incremental-based budgeting, where historical data is used to add or subtract a percentage from the previous period to draft the next budget
• Performance-based budgeting which focuses on the cash flow of each unit of product or service
• Activity-based budgeting which works backward from the company’s goals and works out what the cost of achieving them would be
• Value-proposition budgeting, where only those line items which provides direct value to the company are included

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Importance of Budgeting

Budgeting is a complex activity where you need to pay attention to detail and make informed decisions regarding the allocation of funds.

Here is why it’s important:

• It ensures that an organization has sufficient funds to achieve its goals; with advance planning, you can see which departments and activities need more resources, and where you can reduce spends.
• In addition to allocating expenses, budgets also help you determine how much revenue you need to generate to achieve goals. Budgets help to set pan-organizational and department-wise goals. It is helpful in updating employees regarding the progress of goals and align them towards growth for the upcoming period. Goals determine the expenses required to reach them and vice versa.

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• It helps you to prioritize projects as you have to predict the ROI on investment per project, how they align with company values, and how much impact they have on broader goals. This necessitates the study of how much value each item contributes to the organization.
• Documented budget information is a pre-requisite if you are seeking investment or loans. Lenders and investors will be interested in analyzing your past performance, current situation, and forecasted financial performance too as it shows how good your company is in handling finances and allocating funds.
• Budgets are roadmaps for the near future, but we know that the future can be very unpredictable. External factors can lay the best plans to waste. You must therefore have an agile approach so that you are able to work around the situation and sail through the tough times.

Budgets can help a business stay on track, but don’t necessarily indicate the performance of an organization.

So how can that be established? By performing a budget variance analysis.

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What is Budget Variance Analysis?

Budget variance analysis is a basic corporate performance management activity, and the application is an industry-standard.

Comparison of the budget with the actuals enables the assessment of organizational performance, and take remedial action to be successful.

Actual results are compared with budget values for that period, and the differences or variances if any, are analyzed.

Budgets are created to guide a business towards its goals, and hence, you must regularly measure how much the business stayed on track.

The comparison itself is simple, with the most critical data coming from the variance analysis.

Regardless of whether the results are positive or negative, the analysis is carried out.

Budget Variance in A Flexible Budget Vs. A Static Budget

If you’re using a flexible budget, you can adjust if there are changes in the assumptions you made during budget creation.

However, this is not possible in a static budget and can cause different results to happen when you perform a financial variance analysis.

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Why Should You Assess the Variances Between Your Budgets Vs Actuals?

For any financial planning and analyzing process, one fundamental procedure is budgeting.

Variance analysis helps you investigate the differences between budgeted and actual, and see where your business exceeded expectations and where it fell below par.

Predictive budgeting can also be useful here.

The finance department may need to explain the causes for these variances.

Analyzing where your business performance fell short and where it exceeded expectations, you can learn to change your financial plan in the future according to the changed situation.

The finance department can quantify business performance and the organization’s financial health, giving management visibility into bottlenecks, victories, and new business opportunities.

Basically, you get to see what worked and what did not.

ALSO READ: What Do You Mean by Bank Reconciliation?

Researching each and every abnormal budget variance can be daunting and take up a lot of time, so you need to decide if a specific variance warrants investigation.

Regular variance analysis can help in the prevention of minor frauds, protecting your company’s finances.

Companies can measure their year-to-date performance and identify the initiatives and processes that caused a positive variance.

After conducting an actual variance analysis, management can identify what remedial measures should be taken.

They can take informed, data-driven actions to put the company on the fast track to greater success.

How Do You Calculate Budget Variance?

Mathematically speaking, this is a simple calculation.

Compare the actual results with the budgeted figures and find the difference in both values.

This is the most common approach, though there may be other methods.

You put the budgeted figures in one column, and the actual figures in the neighboring column, and note the difference in another column.

As it is mainly the sales values and cost values that are compared with the budget figures, this process is also called the sales and cost vs budget approach.

A short description is usually written to explain the budget variance.

ALSO READ: What Is an Inventory Control System?

How To Do Budget Variance Analysis?

Using spreadsheets can simplify your task of performing variance analysis.

You can also opt to choose Budget Variance Analysis Software from Tranquil which will consolidate your spreadsheets and save you the trouble of aggregating the data manually.

1. Collect Data

Collect all the relevant data and collate it in a single location, rather than leaving it in silos or disparate spreadsheets; that can cause difficulties in the variance analysis.

Doing this helps in streamlining the report generation and helps you have more control over the different data versions that may be created.

Normally data from various time periods are collected and stored together; you can then display the details more broadly, and detect trends.

The budget must be a part of this data package, as actual results will be compared with it.

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2. Identify the forecast amount

Pinpoint the budgeted amount; this is done using revenue and expenses for calculation.

Tranquil financial accounting software consolidates data and rapidly analyzes it, taking into consideration factors like gross profit, net income, cost of goods sold, and so on.

3. Determine the actual amount

Then you need to calculate the actual results for the specific time period – annual, quarterly, or monthly, depending on how you have budgeted. You’re now ready to calculate the variance.

4. Calculate Variances

After getting all of your data in one place, you can make a template to calculate variance.

Put the budgeted figures for all data points you want to compare in one column, like sales, cost of goods sold, labor cost, etc.

Some businesses may have multiple revenue sources.

Here, the budgeted and actual numbers for all sources must be identified; the same rule applies to expenses as well.

Grouping all sales together might not help you identify which product is doing well and which is lagging.

It can happen that some products are exceeding expectations but others are lagging; hence, there may not be an overall impact in spite of individual variances being present.

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5. Analyze Variances

Before you begin analyzing, determine which variances really need looking into; is the time and effort spent in studying a variance going to be worth it?

A cost-benefit measurement of the time taken for the analysis can be done to set a materiality threshold.

Once these are implemented, you can start analyzing the different variances.

This part takes the most time and effort.

It is critical that the Finance team members undertaking this task are meticulous and diligent when they try to establish the root cause of each variance.

It would be a good idea to work with the different department managers to get an idea about what happened that could have caused the variance.

6. Compile Management Reports

The next step is to combine all the different results into a unified report for the top management.

The report must comprise of the variances that were picked, and the underlying causes for all of them.

The remedial measures and suggestions to the management on necessary actions should also be included in the report.

The analysts conducting the variance analysis should be thorough and document everything.

They must be prepared to make a complete presentation and answer any query top management has for them.

ALSO READ: What is Landed Cost and How to Calculate It?

7. Adjust Forecasts

After identifying the actual values and developing trends, new information must be used to bring the financial models and the forecast up to date.

Forecasts must function like a compass that helps businesses reach their goals, and also monitor them to ascertain that they are on the correct path.

Ergo, forecasts must be updated for the information gained from the variance analysis, as well as the steps the management chooses to implement.

ALSO READ: What is Storage Cost of Inventory?

While financial variance analysis can be done manually, it can eat into your time, and be prone to errors. Implementing an ERP like Tranquil which has a robust financial management module can simplify matters for you. Besides helping you to budget and perform variance analyses, it can help you manage your finances much more efficiently. Do schedule a demo to know more, and we will be happy to explain everything.

 

For any business dealing in products, whether production or just selling of finished goods, inventory is a critical asset.

It is what generates revenue for the business.

Inventory management is therefore a very important function for such businesses.

What Is Inventory Management?

Inventory management can be defined simply as the process of ordering, stocking, using, and selling a company’s stock of goods.

While this sounds simple, it is actually not so.

It is a complex process where the inventory manager has to consider numerous factors.

What to order, how much to order, when to order, whom to buy from – these are questions that must be answered after taking multiple factors into consideration.

The business needs to have sufficient stock on hand to meet the needs of production or sale to customers; however, excessive stock can lead to high carrying costs.

ALSO READ: Common Inventory Management Problems and Solutions

Local vendors may deliver products quickly while international vendors may be much cheaper.

Then there are seasonal variations in demand to consider as well.

Mistakes in predicting demand can cost a business revenue loss or they can end up with dead stock.

So, you can see that there’s a lot more to inventory management than meets the eye.

Business managers often combine different types of inventory management processes and come up with their own unique system that helps them to efficiently manage inventory levels, pricing, supply chain, logistics, and so on.

However, inventory management can be cumbersome and time-consuming if done manually.

An efficient ERP system like Tranquil can help you automate and streamline your inventory management, thanks to its robust inventory management module.

What Are Inventory Models and Why do you Need Them?

Inventory models refer to the different systems of inventory management that are used by businesses in an effort to efficiently maintain optimal inventory levels.

No one method can be considered perfect – each has its own pros and cons.

Here are a few different inventory models for businesses to choose from:

• Just in Time – this method minimizes carrying costs with its near-zero stock but can be badly impacted by price fluctuations and disruptions in supply chain.
• Day Sales of Inventory – this method is suitable when you are dealing with perishable products, and for small retail outlets with minimal space
• Materials Requirement Planning – this method is ideal to source raw materials across complex supply chains
• Centralized Inventory Model – is useful when you want to track and control inventory levels and movement of products, and minimize inventory shrinkage
• Economic Order Quantity – helps to reduce carrying costs, order costs, and shortage costs, as it involves calculating the ideal quantity to order after considering all relevant factors.
• Economic Production Quantity – when you need to control expenses and shrinkage in production, this method is ideal.

There are even more models out there though these are the most popular ones in use.

ALSO READ: Advantages of ABC Analysis in Inventory Management

Top Trends in Inventory Management

Let’s now check out the most popular inventory management trends:

1. Cloud Technology for Hybrid Work

Cloud technology makes inventory management more efficient as the vendor takes care of servers and software updates, and there are fewer IT problems.

Data like purchases and inventory levels can be easily synchronized across stores, warehouses, and supply chains, irrespective of location.

With remote working becoming more common by the day, cloud computing is being increasingly adopted, and it facilitates hybrid work setups as well.

Cloud-based inventory management systems are the best.

ALSO READ: What is Hybrid ERP?

2. IoT for Complete Connectivity

The Internet of Things integrates cloud technology throughout locations, allowing computers to communicate with one another.

It is possible to add products, equipment, scanners, loading bays, and other things to the IoT network.

ALSO READ: Future of Enterprise Resource Planning

3. Connected Omnichannel Services

This refers to offering multiple channels to customers for purchasing goods – physical stores, social media, specific apps, online marketplaces, and company websites.

This also extends to activities like returns, after-sales service, deliveries, and more, and not just marketing goods and services to customers.

They can get access to data related to warehouses, supply chains, and distribution too.

However, omnichannel services necessitate a highly connected system.

From the vendor to the manufacturer to transporters to retailers, everyone has to be connected and communicating with one another to deliver this omnichannel experience.

ALSO READ: Guide on Zero Inventory

A customer must be able to look up prices online, and stocks at a store they prefer, and go to the store to verify the information.

They should be able to know the status of their orders and get information related to possible delays.

This necessitates real-time communication between different systems and updating of information as it changes.

This means that factors like demand planning, supplier management, inventory reconciliation, and tracking of distribution and logistics need to be coordinated.

Thanks to omnichannel services, customers can get the most updated information possible.

4. AI and Machine Learning

AI and ML are no longer new, but they are being increasingly used in inventory management.

As these systems continuously learn about the inventory system of a business, they help in improving it.

They are capable of integrating inventory levels and track movement across complicated networks, and help in detecting inefficiencies increase expenses.

For example, you may be able to discover that a specific type of packing leads to higher shipping rates.

With IoT integration, artificial intelligence and machine learning get more data to study and become more robust.

5. Data Analytics for Predictive Picking

When a sufficiently large amount of data has been recorded and subjected to analysis, you can speed up picking time in the warehouse.

Analytics can show which products are preferred by specific customers, which items are usually bought together, and so on.

These products can be stocked close to each other in the warehouse, saving pickers time and speeding up not just the picking but delivery too.

Data analytics depends on AI, ML, and IoT.

With development happening in these three spheres, more companies will be able to adopt predictive picking.

ALSO READ: How to Avoid Understocking and Overstocking in inventory?

6. Warehouse Automation

Warehouse automation already exists, but industry experts predict that the automation will be taken to newer levels, reducing dependence on human effort, and thereby, wages spends.

With sharp advancements in robotics, AI, and ML, the areas for automation are increasing, and with greater availability of software and hardware, costs are coming down.

ALSO READ: What is Inventory Reorder Point?

7. AVGs and AMRs for Better Automation

Automation means replacing human effort with machines like automated guided vehicles or AVGs, and autonomous mobile robots, or AMRs.

The former has been in use for over 5 decades, while robots of course are more recent, and hence, capable of doing a lot more.

AMRs are fuelling automation of warehouses significantly.

ALSO READ: Why is Cycle Stock Important for Your Business?

8. Multi-Warehousing

Multiple locations of distribution across a specific region, nation, or even the whole world, are required for distributed inventory management.

A geographically streamlined supply chain management and quicker deliveries are made possible when you store supplies and products.

You can scale and grow easily, and handle crises more efficiently too.

ALSO READ: Benefits of E-commerce and ERP Integration

Major global e-commerce companies and online marketplace companies have been using multiple warehouses to expedite shipping and decrease transportation expenses, spurring others to follow suit.

Multi-location warehouses were especially useful during the pandemic lockdowns, and will significantly help during any emergency.

To make multi-warehousing possible, it is necessary to have cloud technology.

Cloud-based inventory management software is becoming more advanced with improved capabilities, and the cost is reducing, making it a better option by the day.

Multiple Warehouses Enable:

• Quicker shipping as your products can be stocked closer to your customers’ location, unlike when you have a single, centralized warehouse.
• Reduction of carbon footprint thanks to faster shipping
• Quick scaling and growth of your business
• Spreading of risks during natural calamities or political unrest; with multiple warehouses, you can pick up products from a warehouse in a safe location and ship to your customers.

ALSO READ: The Ultimate Guide to Dropshipping

9. Third-Party Logistics

Small and medium-sized businesses are normally not capable of funding the equipment, special software, or warehouse designs to get the most out of specific inventory management methods – so they outsource to TPLs or third-party logistics companies.

This ensures that there is no need to make heavy capital investments, as the TPLs have the requisite resources which the business can access for an affordable fee.

10. Smart Inventory Forecasting

With data analytics and artificial intelligence offering improved insights into both sales and sourcing, businesses are better informed and able to make better decisions with regard to purchasing.

With smart inventory forecasting, companies will be able to predict how much inventory they will need with the dynamic conditions and can maintain optimal inventory levels.

ALSO READ: Difference Between Procurement And Purchasing

11. Personalization

Smart inventory forecasting helps in personalizing marketing messages and product suggestions for customers, based on their past purchase history.

The expectation of future purchasing habits can also help businesses in ordering products well in advance.

12. Safety Stock

Safety stock is a buffer that is maintained to protect against sudden and unexpected demand spikes, production disruptions, or delays in receiving goods that were ordered.

The safety stock helps to meet production or sales demands till new stock arrives or is manufactured.

It ensures business continuity; in the event of a disruption in the supply chain or production, or unexpected demand, the company can continue to sell.

Post the COVID-19 pandemic, the importance of safety stock has increased considerably, with more companies opting to maintain a buffer.

13. Sustainable and Robust Supply Chains

Businesses can achieve better communication across inventory management networks thanks to the technology advancements in IoT, artificial intelligence, and cloud capabilities.

Multi-warehousing and other decentralizing methods will decrease dependency on a specific region.

These changes will make supply chain processes more robust and sustainable not only for individual businesses but also across industries.

ALSO READ: What is Product Bundling in Inventory Management?

14. Investing in Inventory Managers

With the increased adoption of technology in inventory management, the way in which this function was handled has undergone a sea change.

Managers have to upskill themselves and learn new ways.

Companies are investing in training programs, courses, seminars, and certifications for their managers so that they become efficient in handling new systems.

This way, the company derives maximum benefits from their technology investments.

These inventory management trends are by no means the only ones or the final word on the subject; however, these are the most popular ones according to industry experts.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

As a business, or as an inventory manager, you can simply choose to implement a robust ERP solution like Tranquil, and take the guesswork out of the equation. Our ERP solution has a feature-rich Inventory Management module that makes use of AI, makes accurate demand predictions, and helps you maintain optimal inventory levels. Schedule a demo to see how our software works; we will be happy to answer any query you may have.

Every business regardless of how big or small has to maintain proper accounts, without which it is not possible to ascertain the financial status of that organization.

In financial accounting, several journals and ledgers are used.

Today, let us take a close look at a cash book , why it is important, and what advantages or benefits it provides.

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What Is a Cash Book?

A cash book is an accounting book that is used to record all receipts and payments made in cash; this includes deposits to the bank and withdrawals as well.

These cash book entries are subsequently posted to the general ledger.

So, one can say that it is a subsidiary book of the general ledger which contains details of all cash transactions that happen during a specific period.

Transactions are recorded as they happen, in chronological order.

It is updated continuously, and the balance is calculated, verified, and carried forward on a daily basis.

Often, large companies that have innumerable cash transactions every day, maintain two cash books – a cash receipts journal and cash payments journal.

It must be remembered that it is not the same as a cash account, which is an account within the general ledger.

There are three main types of cash books: single-column, double-column, and triple-column.

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Features of Cash Book

Let us take a quick look at the features of a cash book:

• It only records cash transactions
• As it records transactions as they take place, and posts them, a cash book functions as a journal and ledger.
• All entries whether debit or credit, are entered in chronological order, according to the date.
• It acts as an alternative to cash accounts
• It follows the dual entry principle of accounting and has a debit and credit side
• The debit and credit side totals are identical at the end of the period, by balancing them
• Normally, the business will have a debit balance, leaving them with adequate cash to meet everyday expenses
• The debit cash balance id verified against actual cash in hand
• Each transaction is directly posted to the relevant ledger
• The balance in the cash book represents the cash fund in the organization

ALSO READ: What is Physical Stock Verification? 

How a Cash Book Works?

A cash book functions as the general ledger’s subsidiary wherein all cash transactions made in a period are recorded in their order of occurrence.

Large companies with complex operations and tons of cash transactions are likely to maintain a Cash Receipts Journal for recording all the cash that comes into the business, and a Cash Payments Journal to record all payments made in cash by the business during the accounting period.

The Cash Receipts Journal includes all such items as money received from customers on pending bills, cash sales, and any other transactions that reduce the accounts receivables by the business.

On the other hand, the Cash Payment Journal includes all items like payments made on outstanding invoices to suppliers, and cash purchases; items that will help reduce the accounts payables by the business.

ALSO READ: Complete Guide on Economic Order Quantity

Advantages of Cash Book

• A cash book helps in creating and maintaining a regular record of all cash transactions in chronological order.
• Any cash payment or cash receipt can be traced in the cash book as the records are in chronological order.
• Efficient management of cash is the main aim of maintaining a cash book, as it becomes easy to check the cash balance whenever required. This helps accountants and managers in the organization to efficiently budget cash when they need to.
• A cash book also enables easy and quick information access as compared to a ledger.
• Cash can be easily verified by comparing the actual cash in hand with the cash book balance; in this manner, it helps in detecting any errors in entries.
• It helps in detecting any attempts at committing cash fraud in the business.

ALSO READ: What is Goods Received Note and Why is it Important?

Difference Between Cash Book And Daybook

A daybook is usually used in a manual accounting system, to record transactions as they take place, throughout the day.

The entries are then posted to various ledgers based on the nature of the transaction.

The difference between a cash book and daybook is that, while a daybook records every transaction, a cash book records only cash transactions that take place.

Some businesses may maintain multiple-day books for different categories of financial transactions; however, there is only one cash book that is maintained.

Large businesses may maintain separate cash books for receipts and payments, which is not the manner in which transactions are recorded in a day book.

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Difference Between Cash Book and Cash Account

A cash book records all cash transactions, but a cash account is an account in a general ledger.

A cash book can function as a journal and ledger, but a cash account structure is similar to a ledger.

The cash book includes narrations with details regarding the use or source of the cash, which is not found in a cash account.

Businesses prefer cash books over cash account as they can easily determine cash balances every day; these are also easy to calculate and access.

The verification process helps to spot errors quickly, and thanks to the daily verification of cash balances, the entries are always kept up to date.

However, the cash account balances are generally reconciled only at the end of the month, once the bank issues the monthly statement.

ALSO READ: Benefits of Bank Reconciliation in Accounting

Recording in a Cash Book

A cash book has two sides, like any other accounting book: debit and credit.

All cash receipts are recorded as debits on the left-hand side, and all cash payments are recorded as credits on the right-hand side.

The balance of cash is arrived at by finding the difference between the debit and credit sides.

If the cash flow is positive, there will be a debit balance, and if the cash flow is inadequate, it will show a credit balance.

The cash book structure is made up of columns and can be in single, double, or triple columns.

In a single-column cash book, only cash receipts and payments are recorded.

In a dual column cash book, you can find details of bank transactions in addition to cash payments and receipts.

In a triple-column cash book, all these details are recorded, and additionally, as details of sales or purchase discounts.

In a single column cash book, you will find four headings – Date, Details, Amount, Folio or Reference Number, ad Amount.

These headings are on both receipts (left) side, and payments (right) side. The date column of course, mentions the transaction date.

As it is continuously updated, a cash book is in chronological order of transaction.

In the Details column, you will find a narration about the transaction, and the account number is written in the Reference Number column.

ALSO READ:  Debit Note vs Credit Note 

Cash Book Protocols

To start your cash book, make a list of the amount of cash with which you started the petty cash fund.

As the next step, make a list of all the purchases paid for with this fund, and subtract that amount.

Once the amount is exhausted, you need to add more cash into it, and make a note of it.

You must reconcile the account by ensuring the fund amount and the book balance are the same, at regular intervals.

ALSO READ: Difference Between Procurement And Purchasing

Cash Book Bookkeeping

The cash book should contain records of all legitimate business transactions, whether expenses or receipts.

For example, money paid for office stationery, raw materials, wages, repairs, etc. are legitimate business expenses.

Cash paid for purchasing personal products should not be entered in the cash book.

Similarly, cash received from sales, and debtors’ payments should be recorded in the cash book as they are legitimate business receipts – not personal loans received, and so on.

Legitimate business expenses should be transferred to the ledger, and you can claim the expenses as deductions after assigning them to the proper categories.

The amounts of money you withdraw from your bank account for funding your petty cash, must be noted in the bank ledger so that you have a proper record of the same.

ALSO READ: What is Job Costing?

Cash Book Issues

Deciding which purchases are the most relevant for cash book accounting can be a bit confusing.

Unauthorized employees may issue cheques or make use of the company credit cards to make purchases (from the petty cash fund) that may be big enough to warrant other payment forms.

If you become too dependent on petty cash purchases, you could end up spending excessively for things that could have been purchased more economically through wholesale vendors instead.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

Conclusion

Manual bookkeeping is not only cumbersome and time-consuming, but is also prone to errors.

A single mistake can have a cascading effect, and impact your financial statements too.

A good solution is to automate and streamline your Accounts functions with reliable ERP software like Tranquil which has a robust Accounts module.

This will help you save time, effort, and money, and ensure accuracy in records.

Moreover, you can leverage the excellent reporting ability of the software and get different types of reports to determine the financial standing of your business.

Still unsure how it will help you? Do schedule a demo at your convenience, and we will be happy to show you how it works. Our representatives will be happy to resolve all your queries.

 

Oil and gas is a critically important industry, and also very expensive and complex.

They are highly reliant on accurate management of workflows and market analysis.

Managers in the industry struggle to keep up with the rapidly evolving demands of commodities and maintain a balance between changing regulations and resource availability.

Workplaces are spread across multiple geographic locations as well.

The demand for energy-related products is on the rise throughout the world as research results in innovative products that depend on oil and gas products to operate.

ALSO READ: Guide on How Do ERP Systems Work

ERP for oil and gas industry can help them manage their production better and enhance overall efficiency by integrating all the information in a central location in a single application.

It is not an entirely new concept; several oil and gas companies have been using ERP solutions since the 1950s.

However, depending on legacy systems can be problematic as other stakeholders like suppliers, distributors, and customers would have moved on to new, improved software.

ERP oil and gas is vital in ensuring greater efficiency of operations for oil and gas businesses corporations.

They can help monitor projects and operations effectively, ensuring growth and profitability.

However, when the business grows continuously, it is essential that the efficacy and vulnerability of the ERP system in use is evaluated; if it does not serve the purpose anymore, it may be time to switch to an innovative, effective, and cloud-based system like Tranquil.

The ERP Systems for Oil and Gas Industry

The oil and gas industry is highly complex, with many regulations to maintain compliance with, and safety concerns to take care of.

It can be highly challenging to generate revenue and keep expenses down, but an ERP system can deliver the solution here.

ERP software for oil and gas industry typically has the following modules: Financial management, project management, inventory management, supply chain management, asset management, production management, and Operations Management, which helps manage natural resources, schedule production, and execute quality control measures.

When each level in the supply chain is well linked to the others, the operations can be managed more efficiently, and you will be able to respond to unforeseen circumstances quickly too.

ERP systems make sure that you have sufficient inventory to fulfil consumer demand while keeping carrying costs low and eliminating excess inventory.

Our ERP solution can make accurate forecasts thanks to its excellent data collection and analysis and robust report generation.

ERP oil and gas also helps in automating business processes, boosting efficiency and customer satisfaction.

Integration of all the relevant data into one application makes it easy to handle all the tasks and processes efficiently and increases productivity.

ALSO READ: Important ERP Modules and Functions 

Does the Oil and Gas Industry Use ERP?

In an era where the world is searching for alternatives to oil and gas products, ERP systems are even more valuable, and mission-critical to operations than ever.

Increasing compliance mandates and wildly fluctuating oil prices, and volatility of resources has sealed the need for ERP solutions for the monitoring and management of business operations.

ERP can help oil and gas companies:

• Enhance safety during production
• Reduce expenses with improved inventory management
• Adhere to regulatory compliance requirements

Oil companies have been using ERP systems for managing their functions of exploring, producing, refining, distributing, and retailing.

However, they are now also adopting ERP for managing support functions.

ALSO READ: Influence and Importance of ERP System in Different Industries

ERP Software Benefits for Energy and Oil & Gas Industries:

There are a number of reasons why businesses in the oil and gas industry use ERP.

Let us look at the benefits in detail:

1. Seamless Management of Business Processes

The various processes involved in oil and gas exploration and production are critical and risky, and it is essential that these are monitored and managed efficiently.

This includes managing the rig, land and water management, site engineering, tracking the fleet, maintaining compliance, and checking performance of the workforce and project progress.

It is impossible to be present in far-flung locations all the time.

ERP systems allow access to users in real-time, empowering them with critical business information that can help them take vital decisions.

It also ensures inter-departmental communication and collaboration, boosting productivity and efficiency.

ALSO READ: Benefits of ERP for Steel Industry

2. Easy Integration

ERP software can be easily integrated with third-party business applications, enabling you to monitor resources and expenses across your organization.

This is very valuable and can help in meeting production deadlines and deliveries.

3. Consolidated View of Business Processes

ERP software has client-side and server-side functionality that can be tweaked to match your unique business requirements.

You can get overall visibility into your business processes, fulfilling the need for crucial data that help in meeting compliance and adhering to regulations.

It also helps your supervisors and managers to check on the progress of employees in real-time.

Thanks to sophisticated reporting and analysis, it can boost employee morale and productivity, and help you craft robust strategies to improve performance.

ALSO READ: Advantages of ERP to Automotive Businesses

4. Manage Risk

ERP software can help oil and gas businesses to recognize the risks in a project much in advance so that you can have a clear picture regarding what to expect and about the potential success of the project.

It can also help with developing contingency plans to deal with emergency situations.

5. Control Cost

Oil and Gas ERP software will help you to reduce expenses by analysing your overhead and labour spends.

With a bird’s eye view of all expenditure, you can manage your demand and supply chain more effectively.

Tranquil has a feature-rich finance module that will also help you to maintain compliance with legal requirements and industry regulations, especially for international transactions, like entering into procurement or logistics deals with other nations.

Our software supports multiple currencies, so you can rest assured that everything will be managed smoothly.

ALSO READ: ERP Trends 

6. Efficient Project Management

Tranquil Cloud ERP will allow you to monitor and handle your onshore and offshore projects efficiently, including resources, finances, schedules, and inter-department communications.

Large and complex projects can be divided into smaller and easily manageable chunks like tasks and jobs, making it easier to meet deadlines and milestones, and to stay within the budget.

ERP software is especially valuable when there are international joint ventures, facilitating local technical assistance and finance management.

ALSO READ: Benefits of ERP for Chemical Industry

7. Local and Global Financial Reporting

The oil and gas industry is essentially an international one; wells and refineries are often in separate countries, and customers are spread all over the world.

Each nation has its own taxation laws and systems, which may be based on sales revenue or volume that comes in or goes out of that country.

A company that wants to do business must be prepared to present whatever financial reports the tax and regulatory authorities demand; a business should also try its utmost to reduce the tax burden on itself.

Tranquil is adept at handling the local reports and in balancing the international tax burden.

8. Asset Management

The asset management module in Tranquil helps you maximize the performance of your assets.

Regular maintenance can help in ensuring excellent performance, prevent disruption in production, and extend the working life of your assets.

An ERP system will help you automate the maintenance schedules so that you don’t forget, and meticulously track all your assets, even after you have retired them or they get stolen or damaged.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

9. Real-time Hard and Soft Asset Control

To ensure efficiency in operations in the oil and gas industry, it is crucial that there are asset controls.

This is because there are wide-ranging dependencies that include acquisition, development, research and development, shipment, etc.

Additionally, you have industrial equipment like rigs, heavy vehicles, pipes, different software systems, hardware and so on, which are all utilized in the delivery of the final product.

A robust ERP system will be able to handle these disparate elements smoothly and without hassles.

ALSO READ: ERP software in Warehouse & Fixed Asset Management

10. Quality Control

In the oil and gas industry, quality control is a very important aspect – and ERP software is valuable here.

The oil and gas products are expensive and essential but potentially hazardous to the environment too.

ERP software is capable of tracking loss in distribution to minimize incidences and to help with compliance reports in purification and refining.

The losses may be solid, liquid, or gaseous; ERP software can help with the conversions.

Each business has its unique requirements; Tranquil ERP can be customized to ensure that your needs are fulfilled optimally.

ALSO READ: How ERP Can Improve Business Efficiency?

11. Helps with New Employee Training

ERP software can be leveraged to pass on the vital technical information to the new engineers and technicians, as all the data is recorded in the software.

The ERP can easily integrate new recruits into the various processes like energy exploration, monitoring, production, refining, and so on.

ALSO READ: Benefits of Having an Employee Self-Service System

12. Business Intelligence

BI is important for all businesses but especially so in the oil and gas segment; international politics and economic conditions need to be constantly monitored to establish the potential impacts on supply and demand.

Companies have to stay on top of compliance requirements, which are subject to change suddenly without notice.

ALSO READ: BI vs ERP

13. Active Compliance and Policy Management

The oil and gas sector is one of the most highly regulated industries, with rules becoming stricter ever so often.

Having to manually keep track of changing regulations across all the countries that a company deals with, can be quite overwhelming and time-consuming.

ERP software for oil and gas can help in this regard, notifying you of any changes in regulations, and helping you stay in compliance.

ALSO READ: Factors for a Successful ERP Implementation

Final Thoughts

ERP software is an indispensable tool for any business that is serious about improving productivity and efficiency; in an industry like oil and gas, it is absolutely critical, thanks to the intense competition, and unstable economic and regulatory environments that it operates.

Robust ERP software like Tranquil can help ease your work in this regard. It’s a secure, cloud-based ERP solution that will make life simpler. Don’t believe us? Simply schedule a demo at a time of your convenience, and we will be happy to show you how!

 

A ledger is a book of entries that contain detailed information of transactions of one account or type of transaction or a summary of all the financial transactions of a company for a specific period.

In other words, the principal account book which contains the balance for each account.

All sets of accounts like nominal, real, and personal, are included in it.

ALSO READ: Benefits of Bank Reconciliation in Accounting

A ledger is the second book of entry which contains everything you need to prepare the trial balance, and profit and loss – the important financial statements for any business.

The entries in the journal are categorized

We have seen that an accounting ledger is basically a catalogue of general accounts within the accounting system in a business.

All the transactions happening in a financial year in any business, are recorded by debiting and crediting the relevant accounts.

These transactions are triggered by normal business processes by adjusting entries or charging customers.

While some businesses still perform manual accounting, most businesses today, especially large corporations with multiple locations and complex and voluminous transactions have switched to accounting software.

What is General Ledger?

The general ledger is the accounting book that contains a summary of all financial transactions of a business in a specific format for a specific period, and it helps to determine the closing balance as on the last day of that period.

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What is Ledger Account?

A ledger account contains the record of every transaction with regard to a specific account within the general ledger.

Individual transactions within the ledger account are recognized with unique transaction numbers, dates, and descriptions which clarify the nature and reason of the transaction.

Each account that the business deals with has an individual ledger account that contains a summary of the account, or the closing balance for that specific period.

Bank, cash, debtors or accounts receivable, creditors or accounts payable, fixed assets, taxes, loans, salaries, profits, etc. are some examples of common ledger accounts.

What is Ledger Accounting?

It is simply a record or account of book-keeping entries that help prepare income statements and balance sheets.

There are three main types of ledger accounts – nominal, real, and personal.

Nominal accounts contain accounts that deal with expenses, incomes, losses, and gains.

Examples are purchases, sales, salaries, commissions, and similar accounts.

Real accounts contain accounts of assets and liabilities like accounts payable, fixed assets, prepaid expenses, cash, debts, loans, and accounts receivables.

Personal accounts contain accounts that are related to transactions with individuals and organizations with whom your business transacts directly.

Customers, vendors, business owners’ capital accounts, etc. are examples of personal accounts.

ALSO READ: What is Goods Received Note and Why is it Important?

Types of Ledgers

The three main types of ledgers are:

• Sales Ledger
• Purchase Ledger
• General Ledger

The Sales Ledger is where a business records all transactions related to the sales of their goods and services, and the cost of the products sold to customers.

It provides an idea about the revenue from sales.

The sales ledger also offers item details, transaction date, the amount sold, and if the sales were cash sales or credit sales.

Most businesses prefer to maintain this information on a monthly basis though it can be done quarterly and annually as well.

The value of the transactions is more important than the volume.

ALSO READ: ERP vs CRM

A ledger only contains data for a single company.

In case there are subsidiary companies, separate ledgers are maintained.

Likewise, credit sales information is maintained in a separate ledger than the cash sales ledger.

The Purchase Ledger is where a business records all transactions related to the purchase of raw materials, services, goods, and accessories from other businesses, and offers visibility into how much money the business pays other businesses.

This ledger basically contains details about all such items purchased along with the quantity, cost, and date.

Just like sales ledgers, the purchase ledgers can also be on a monthly, quarterly, or annual basis, depending on your preference, and considering the frequency of purchases.

Also, a sub-ledger for credit purchases is helpful in knowing how much you owe and their due dates.

ALSO READ : Benefits of ERP in Accounting and Financial Management

General Ledger is of two types, nominal and private.

We have already seen that the nominal ledger contains information related to income, expenses, insurance, depreciation, etc.

The private ledger contains information like salaries, wages, capital etc.

It is not accessible to everyone, and hence private.

Basically, all entries that cannot be posted to any other ledger, are posted to the general ledger.

Journal Vs Ledger In Accounting

Often people confuse the two terms and use them interchangeably.

It’s true that both these books of account are important, and eventually help in determining the financial status of a business.

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Let’s look at journal vs ledger to understand the differences.

• Journal is the minor or subordinate book of accounts used for documenting transactions whereas ledger is the main accounting book. It classified journal entries (transactions) based on their nature.
• Transactions in a journal are recorded in the chronological order as they happen, whereas in the ledger, the journal transactions are organized under individual accounts.

ALSO READ: Important ERP Modules and Functions 

• Journal entries contain complete transaction details which is not seen in the ledger.
• The ledger provides the result of transactions which is missing in the journal.
• Balances from various ledgers help to prepare financial statements of a business-like profit and loss account and balance sheet whereas the journal has no direct role in the creation of these statements.

The Benefits of a General Ledger

The ledger books offer several benefits, like

• Help to understand the status of the business at any given time; a cash ledger reflects the available cash on a date, for example.
• It aids in performing bank reconciliation as all transactions for an account at a bank are available in one place.
• As ledgers are classified at the time of their setup by a business, they can get a look at say all their debtors or all creditors quickly.

ALSO READ: What is Landed Cost and How to Calculate It?

• General ledger offers an overall view of an organization’s transactions to auditors, who can analyse them to gain a clear picture about the business.
• It facilitates the proper organization of accounting and helps in the preparation of trial balances – a precursor to the preparation of the profit and loss statement.

Steps to Prepare the General Ledger

Posting

Posting refers to the practice of shifting journal entries, both credit and debit, to classified accounts in the ledger.

There are certain rules to be followed for posting which have to be followed without which you are not likely to get a true picture of the business or prepare the financial statements accurately.

Rules for Posting of Entries in the Ledger Accounts:

• Each account needs its own individual account in the ledger
• To or Dr is used in the Particulars column when the account is on the debit side and By or Cr is used when the accounts are on the credit side. For example, when you have paid a vendor X SAR 1000, the entry will be: By X 1000, or Dr X 1000. The interest received on deposit will be entered as To Interest 2500, or Cr Interest 2500.
• The account debited in the journal has to be debited in the ledger with the reference of the relevant credit account.

ALSO READ: Complete Guide on Economic Order Quantity

Balancing an Account

Closing balance is derived at the end of every month, and at the end of the financial year.

However, you can do it on any given day if required for an audit or any other reason.

This is a simple process.

Let’s suppose you have purchased raw materials worth SAR 30,000, and you have paid your supplier SAR 12,000.

The closing balance against this vendor is SAR 18,000.

It will become part of your accounts payable.

To calculate the closing balance, all you have to do is sum up both sides and find the difference – this is the closing balance.

The account has a credit balance if the credit side is more than the debit side; it will have a debit balance if the debit side is more.

ALSO READ: Debit notes Vs Credit Notes

Credit balance is usually expressed on the debit side as ‘To Balance c/f’, meaning carried forward.

This balances both sides.

When the accounting for the new period starts, this becomes ‘by Balance b/f’, or brought forward, and is the opening balance for the same.

It will be written on the credit side.

The same process is followed if it is a debit balance; the balance is carried forward and written on the credit side, balancing both sides.

Then for the new period, the balance is brought forward and written on the debit side.

Procedure for Writing Ledger

Though accounting software is used by most businesses today, you can create your own general ledger.

Accounting software posts every financial transaction straight to the general ledger.

ALSO READ: Complete Guide to Cash Flow Analysis

Step 1: Create Ledger Accounts

Separate ledgers need to be maintained for separate accounts.

Cash ledger will contain all cash transactions of the business.

Unexpected expenses are normally included in the general ledger account.

The basic ledger account types are Income, Expenses, Assets, Liabilities, and Other Income and Expenses (usually not directly related to the business); some may also include Equities.

Make a list of accounts you need within each account type.

You can create Accounts Payable, and loans under Liabilities, for example.

Step 2: Create Columns

On the left side you can have columns for journal entry number, date, and description.

On the right side, make columns for debit, credit, and running balance.

Debits enhance asset and expense accounts, reducing liability and revenue.

Credit entries enhance liability, revenue, and equity, decreasing assets and expenses.

Basically, credit is what you have paid or is owed to you, and debit is the money you owe or receive.

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Step 3: Recording Financial Transactions

Record every business transaction as it happens on a daily basis. Post journal entries to the relevant ledger immediately.

Step 4: Prepare the Trial Balance

Make a summary of the closing balances from the general ledger and display the totals of each account to prepare the trial balance report.

Once these are matched, you can use them to prepare the financial statements.

In accounts, the double-entry system is followed where every financial transaction has an impact on two separate ledger accounts, and each entry being recorded in two columns.

The debits are posted on the left, and the credits are posted on the right side of the ledger.

The total of all debit and credit entries have to balance.

ALSO READ: What is Zero Inventory and Why it is Important?

Automation Eases your Work

As you can see, doing all of this manually not only takes time but effort as well.

Additionally, you may even have several errors.

A much better option is to take the digital route. Implement a top-class ERP solutions like Tranquil, and its robust finance and accounting module will do all this and much more for you.

Streamline your entire accounting process and classify transactions accurately with our ERP software.

Focus your energies on core business activities that add value and accelerate growth.

Do schedule a demo of Tranquil Cloud ERP at your convenience, and we’ll be happy to show you how it can benefit your business.

 

It’s a well-known fact that stock or inventory is the most crucial aspect for any business that deals in products.

They have to monitor their movement as well as their shelf life so that they don’t end up with excess stock or have stock-outs.

Carrying excess inventory results in heavy expenditure in the form of warehousing, labour handling, utilities, security, insurance, audits, and so on.

The business may also end up with dead stock – goods that sell slowly and eventually remain unsold due to reasons like obsolescence, or because they get damaged.

If you are short-stocked, you risk losing sales, and eventually, customers.

ALSO READ: Top 4 Benefits of Stock Status 

Stock aging is one method that will help you store the requisite inventory stocks, removing those products which can hamper your profitability.

Keeping a tight control of aging inventory offers several benefits to businesses.

You can take speedy, informed decisions to boost the revenues and growth of your company.

The inventory aging report provides important KPIs regarding inventory status and the speed at which it moves.

In essence, it is a list of products on hand, categorized according to the time they have been in stock.

The book-keeper has to establish slow-moving or obsolete inventory which has to be revalued.

This helps to calculate the cost of goods sold precisely.

The stock aging report easily enables this process.

It offers information on the inventory to be bought, thereby helping to reduce the inventory storage cost.

Reports can be generated automatically when you have robust ERP software like Tranquil.

ALSO READ: What is an Inventory Control System?

Calculating the Average Inventory Age For your Business

Calculation of average inventory age is crucial for inventory management, as this points to our inefficiencies and lost profits.

To calculate the inventory age of your products, you must know the average cost of inventory, inventory turnover ratio (ITR), and cost of goods sold or COGS.

Average inventory cost formula: cost of goods sold in a year/closing inventory balance.

You need to have a clear understanding of these numbers as they can convey if the stock of goods you have in your warehouse is actually affecting your profitability negatively.

When you are clear about these figures, it can empower you to manage your inventory better.

ALSO READ: Common Inventory Management Problems and Solutions

Know the Cost of Goods Sold

This is nothing but the cost incurred to manufacture the products that you sell. It includes costs that can be directly linked to production, like raw materials, labour, commissions, fuel, electricity, and so on.

However, it does not take into consideration indirect expenses like administration expenses, marketing, software, etc.

COGS formula: Inventory opening balance + purchases made in the period – closing inventory balance = cost of goods sold.

Inventory opening balance refers to the quantity of inventory left from the previous period, which could be month, quarter, or year.

The closing inventory is what you have left, or did not get sold in that same time period.

Purchases made during the period is the cost of your purchases in that same period.

Know the Inventory Turnover Ratio

This ratio expresses how many times a business sells and replenishes its inventory in a specific time period, like a year, or a quarter, or even in a month.

When you calculate your inventory turnover, you will be better equipped to make the right decisions on not just purchasing inventory stocks, but also regarding production, marketing, and pricing as well.

ALSO READ: What is Zero Inventory?

Inventory Turnover Ratio formula: cost of goods sold / average inventory during the period.

A slow turnover rate could mean you have a huge stock of excess or slow-moving inventory, or that your sales are poor.

A high ratio is likely to mean you have excellent sales, or that your inventory levels are inadequate.

In any case, it is a critical tool of inventory management analysis.

The Next Step: Dividing by the Number of Days

The age of your inventory conveys how many days it takes for your business to sell certain products, on average.

Therefore, inventory aging analysis method is preferred by analysts to check how efficient the sales of a company is.

Days sales in Inventory or DSI is another term used for the average inventory age.

ALSO READ: ABC Analysis in Inventory Management

Know the Average Inventory Cost

The average cost of inventory basically refers to the quantity or value of the inventory of a company over a particular period of time.

Seasonality can cause inventory balances to fluctuate tremendously.

It depends on when shipments are received and so on.

When you calculate the average cost, it neutralizes the effect of these sudden spikes and slumps.

It also serves as a rational guide to the valuation of inventory.

Inventory Aging Formula

To determine the inventory age of the products in stock, use the formula:

The average age of inventory = (Average cost of inventory / Cost of Goods Sold) x 365.

We strongly recommend that as a retailer, you confirm this figure with gross profit margin or other inventory KPIs.

ALSO READ: How Can you Track Inventory UOM?

Why Stock Aging Analysis Is Crucial for Businesses

There are a number of reasons that the inventory aging report is important for businesses.

It identifies slow-moving and non-moving products.

It empowers your Purchase department with the information they require to make the right choices when it comes to ordering products; likewise, the manufacturing department is better equipped to decide what to produce, and how much to produce.

The stock aging report also provides insights into the extra cost incurred on products that stay in your inventory for a long time without getting sold.

ALSO READ: What is Inventory Reorder Point?

Let us look at all these causes in some detail to get a clearer picture.

• Inventory aging or the time duration of your products remaining in your inventory should be properly understood so that you can make a comparison with the benchmarks set by the industry – basically, your biggest competitors.
• Stock aging can be used for every type of inventory item.
• The stock aging analysis report helps you to know how quickly each inventory item moves, and the reason why certain items move slowly. Knowing which items are not quickly moving out of the inventory will help you in deciding what items to order in the future.

ALSO READ: Top Inventory Reduction Strategies 

• The report can include the date of arrival of an inventory item along with information regarding the delivery schedule; this can help you immensely in concentrating on the items that take the longest time to move.
• Better decision-making with regard to timing and quantity of purchasing inventory or manufacturing
• Helps to sell off old or outdated stock at discounted prices
• You can establish costs related to quality maintenance, storage, etc. for the duration that you have the products in your inventory, and look at ways to reduce them to manageable levels.
• Enables businesses to evaluate and think about alternative methods for proper management of inventory to reduce inventory aging or time the products spend in your warehouse or store shelves.

ALSO READ: Importance and Calculation of Safety Stock

• Determine which products spend more time in your inventory and hence move slowly, and if you can rearrange the product mix for optimal results.
• Determine if the delivery systems of different vendors have an effect on the time the goods remain in warehouses as inventory – for example, requirements regarding volume and delivery schedules.
• Provides valuable insights into additional costs like electricity, security, insurance, and even taxes in some cases. These expenses are incurred to keep the products in a saleable condition. For example, produce needs to be refrigerated, certain medicines as well; high-value items may necessitate tight security, and so on. Having a lot of products in your inventory for a long time also restricts the space available in your inventory – you could have used the space to store your biggest-selling items. This is the element of opportunity cost you incur.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

Useful for Investors

Further, Stock aging analysis insights allow entrepreneurs and managers to be able to predict certain events that are capable of impacting the organization.

Stakeholders like investors, and even potential investors closely watch business growth, and they are interested in learning how you manage your inventory as it’s a key component of good overall management, and impacts growth.

Improve Storage Cost Efficiency

Inventory carrying costs, or holding costs, are not likely to come down any time in the foreseeable future.

However, thanks to inventory aging analysis, you can avoid or reduce charges for long-term storage and improve cost efficiency significantly.

ALSO READ: Understocking Vs Overstocking in inventory?

Inventory aging reports offer details on the duration that products remain in inventory; this enables businesses to create strategies to sell them off.

This is especially useful for companies that use third-party logistics or FBA warehouses, as in both cases you need to pay a hefty fee if your products stay there for extended periods.

Optimize your Inventory Control Strategy

Supervising the supply, storing, managing, and distrusting of your stock of goods is at the core of inventory control.

Both warehouse management and inventory control involve methods that help avoid stockouts, selling products, not in hand, and delayed restocking schedules.

By adding inventory aging analysis in the mix, optimizing your inventory control strategy becomes a breeze.

A properly conducted inventory aging analysis helps you to understand precisely what is available in your stock, and provides the information that facilitates increased inventory turnover – like reduced obsolescence, spoilage, and expiry of products, and so on.

ALSO READ: What is Negative Inventory?

Minimize Excess Inventory

Products that are at the end of their life cycle but are still languishing on your warehouse racks because the projected demand was way higher than the actual, are referred to as excess stock or inventory.

There’s no two ways about the fact that it does not augur well for a business.

It reflects poorly on your inventory management skills and affects your revenue negatively as well.

By focusing on aging inventory, you can decide not to order or manufacture the slow and non-moving items, and come up with a plan to get rid of all dead stock.

You can also innovate and come up with new products that are capable of attracting customers.

Maximize your Cashflow

Every business looks to maximize its cashflow – after all, what is your business without good revenue?

You need cash to pay wages, utilities, vendors, and of course, take home some profit as well.

If you have put in a lot of cash to purchase goods that are moving like snails, you may be left with insufficient funds to purchase fresh and innovative products that are sure sellers.

Inventory aging calculations can help you pinpoint the items that incur high carrying costs as they remain in inventory for an extended time period.

This will help you to plan to dispose of this stock as quickly as possible.

ALSO READ: Importance of Stock Keeping Unit (SKU)

The importance of proper inventory management cannot be stressed enough, but you don’t have to stress yourself! Invest in Tranquil, the right ERP, and its feature-packed Inventory Management module will do the work for you. Do schedule a demo at your convenience, and we’ll happily explain how it works.

 

The Accounts department of a company has numerous tasks to perform every single day – recording all transactions in the correct books of account, posting to the ledger.

ALSO READ: Important ERP Modules and Features

What is Bank Reconciliation?

A bank reconciliation statement is a synopsis of the banking and business transactions of an organization, and it compares and matches the bank account with the financial records of that organization.

This is done by checking the general ledger entries against the bank statements.

This statement contains all activities that affect a bank account for a particular time period, like deposits and withdrawals.

Preparing this statement helps businesses to detect bookkeeping mistakes, and is very valuable in preventing fraud.

ALSO READ: What is Goods Received Note and Why is it Important?

The Difference Between Cashbook and Bank Statement

The cash book balance shows the transactions recorded in the general ledger of a business.

The bank statement balance shows the cash balance as per the bank’s records.

This is the difference between the cashbook and bank statement balance.

Both are compared and matched to prepare the bank reconciliation statement.

The Importance of Bank Reconciliation Statements

For any business regardless of size or industry, bank reconciliation statements are extremely important.

The key objective of reconciling bank statements for small businesses is ensuring that the recorded balances in both the bank statement and in the ledger, match up; this helps manage and track the cash flow of the business more effectively.

ALSO READ: Complete Guide on Economic Order Quantity

Let’s look at why you must reconcile your bank statements in some detail:

• Fraud identification – this has to be a priority when reconciling your bank statements, you can try to verify if the cheques you issued changed in any way, or if any unauthorized cheques were issued. See if any deposits are missing, or if money was taken out or transferred to another account without the proper authorization.
• Validate data entry – this process will help you detect anomalies like duplicate entries, entry of wrong amounts, missing entries, and so on.

ALSO READ: What is Storage Cost of Inventory?

• Check the accuracy of financial statements – while not very common, banks can make errors too. Performing a bank reconciliation is a way of checking if your bank statement matches your ledger statements. Basically, it’s a way of ensuring that the general ledger postings and the bank transaction records are accurate.
• Minimizes fraud – proper bank reconciliation process can help prevent employees or others from committing financial fraud in your company.
• It can help identify potential delays in clearing cheques.

In case the ledger balance and bank balance don’t match up, you need to sit and examine both sets of records to find out the cause of the irregularities, and take corrective actions.

ALSO READ: Debit notes and Credit Notes

How Frequently Should Bank Reconciliation be Performed?

Ideally, bank reconciliation should be performed every day so that you can ensure that no financial irregularities or fraud can happen.

Larger organizations may perform this activity on a monthly basis; however, there is a possibility of multiple anomalies being detected, and these are likely to pile up increasingly – hence the case for daily reconciliation.

Reconciling bank statements enable the detection of irregular transactions that could simply be the result of accounting mistakes or deliberate fraud.

Bank reconciliation does not have to be a formal process – it can be carried out informally as well.

It is even recommended that individuals also perform bank reconciliation and verify that the balance as per their chequebook and the balance as per the bank statement is the same.

ALSO READ: What are the Key KPIs for ERP Implementation?

What Happens if You Do Not Reconcile Your Bank Statement

In case you do find any mismatch between the amounts and the accounts, you need to determine the causes and be able to explain them.

For example, you may have some cash in hand which is recorded in the ledger but will obviously not show in your bank statement.

But if there are anomalies which you are unable to explain, it means there is a problem; you need to rectify those before it blows out of proportion.

If you don’t reconcile your bank statement, employees or anyone else may commit fraud and you may find out too late.

Consumer bank accounts have more protection than businesses; ergo, it is critical that businesses detect abnormal activities in the early stages.

You cannot be sure that the bank will detect and correct abnormalities on their own.

ALSO READ: What is Capacity Requirement Planning?

How to Prepare a Bank Reconciliation Statement?

To perform the bank reconciliation properly, you need to have the current month and previous month’s bank statements, and the company ledger.

You can do this with a spreadsheet, or online templates, or use an ERP system like Tranquil with a robust finance and accounting module.

• Start with the closing balance of the previous month – this will be your opening balance for this month.
• Deduct any cheques issued but not yet cleared, and add deposits made but not yet credited. This is the adjusted cash balance.
• Add any interest earned on deposits, and deduct fees charged, penalties, etc. that were not yet recorded in your books of account.
• Check if the amounts of your deposits and cleared cheques are the same as what the bank records show. The final balance must be a match.
• If you detect any anomalies, think about what mistakes the bank has made or what you have missed in your records.

ALSO READ: What Every Business Should Know About CPQ?

Example of a Bank Reconciliation Statement

We have seen what is bank reconciliation; companies can recognize the source of errors and rectify them when anomalies are detected.

Let’s understand this with an example.

Company X recorded a closing balance of SAR 500,000 in their books of account. But the bank records show a closing balance of SAR 575,000.

Company X then investigates the matter.

They find out that a cheque issued to a supplier for SAR 50,000 hadn’t been presented for collection, and that a cheque was sent by a customer for SAR 25,000, which the accountant had inadvertently forgotten to record in the company’s books.

Company X adjusts its records, adding the missing deposit, and making a note that a cheque is outstanding.

ALSO READ: What is Product Bundling in Inventory Management?

Adjusting Balance per Books

The cash account balance in the financial records of a company may have to be adjusted too.

For example, you may incur a charge or fee for having an account open.

Usually, the amount is withdrawn from your account by the bank and it processes the fees automatically.

Hence, when you reconcile the bank statement, you need to ensure that there is a corresponding journal entry in your account books to account for these charges.

You also need to adjust the interest earned on your deposits.

ALSO READ: What Are the Stages of Fixed Asset Lifecycle?

It is normally deposited automatically into the account at pre-determined intervals like monthly, quarterly, or annually.

To account for this amount, you need to make an entry in your books of account that reflects the increased cash that has come in.

Once all the adjustments are made in the books, the bank balance amount and the balance as per your account books should be the same.

If the numbers are a match, it means that your bank reconciliation statement has been successfully prepared.

What are the Challenges In Reconciling Bank Statements?

Reconciling bank statements is an essential activity and it provides several benefits.

Performing daily reconciliations can be pretty challenging, especially when you are using manual or outmoded systems.

ALSO READ: What is Batch Picking? 

These are the most common problems companies face:

1. Slow Processing of Data Input

When analysts manually login to banking systems to extract bank statements, and then access the company books of account, possibly from some accounting software, to reconcile it with the cash balance.

This necessitates a high degree of manual intervention, and the process may become slow, and also ties up employees in this cumbersome task.

2. Greater Possibility of Errors

Manual reconciliation can give rise to more errors; this defeats the purpose of improving accounting accuracy.

ALSO READ: What is Cross-Docking and How Does it Work?

3. No Central System for Auditing

Once you have reconciled the bank statement, it must be safely stored so that it can be used for audits in the future.

Maintaining multiple files becomes problematic when you are performing paper-based reconciliation statements.

The Need for Automation in Bank Reconciliation

More and more organizations are veering towards automation in accounting to ensure better accuracy.

Automation can eliminate possibilities of manual errors in data entry and bank reconciliation.

But how exactly will this happen? What is bank reconciliation software and how will it impact reconciliation?

Bank reconciliation software automates the bank reconciliation process, and allows accounting teams to access the ledger balance in real-time, items from the previous months, and compare invoices and bank statements.

These bank statement reconciliations can be electronically signed by the Accounts team and sent for approval to the relevant executive.

After approval, you can retain the data in your system database and use it as an audit trail.

ALSO READ: What is Dead Stock – How Can You Avoid It?

Benefits of Bank Reconciliation Software

1. Automation Brings in Efficiency

Most Finance and Accounts teams spend a great deal of time in data entry, attempting to glean irregularities, wasting time on monotonous and cumbersome tasks.

The bank reconciliation software automates this process, allowing your team to work on value-adding tasks, enhancing accuracy, minimizing audit risks, gaining insights, and having stricter control.

2. Better Internal Controls and Less Errors

The software improves internal control be enabling companies to see how the whole process works, increasing their confidence in its consistent smooth operation.

It helps to stop activities that are not authorized; you can set alerts to be sent in the event of abnormal changes and activities.

Eliminating manual data entry and adopting automation can help minimize errors, saving you money by detecting errors in real-time before they blow up.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

3. Higher Transparency and Audit Trail

As all the reconciliation and data history is saved automatically by the software, it is useful to be used in audit trials and helps maintain compliance.

Historical data records help in checking cost of specific items in the past, and you can use this information to budget expenses in the future.

In fact, it will help you to budget more efficiently, and manage your organization’s funds much better.

4. Delegate Responsibilities

Reconciliation software can help you allocate responsibilities and also control access.

This will help your Accounts team to get a clear picture of their roles and responsibilities.

In case approval is needed for reconciliation, this will be assigned to the relevant executive automatically.

ALSO READ: Different Ways to Improve the Procurement Process

Keep your organization safe from financial errors and fraud, and allow employees to focus on more important tasks with our bank reconciliation software. Do schedule a demo with us at your convenient time to see for yourself how it works.

 

Procurement is a critical activity for any business that deals in products – more so for a manufacturing company.

How you utilize finances to acquire raw materials, accessories, and finished goods required by the business to operate, and what price you pay, all fall in the ambit of procurement.

Procurement impacts nearly 70% of your business revenue directly, which means it is very closely linked to the financial operations of your business.

It is essential, therefore, that:

• The procurement process is made efficient
• Cost-saving opportunities are identified as an ongoing process
• Strong and long-term relationships are built with vendors
• Supply data is properly tracked for future reference

One data point that you must have a good understanding of is the goods coming into your organization, and the Goods Received Note is useful for this purpose.

It is an important document and plays a huge role in Accounts Payables.

It can help businesses eliminate confusion in the future.

ALSO READ: What is Delivery Performance and How Can it be Improved?

What is Goods Received Note (GRN)?

A Goods received note is a document that recognizes the delivery of goods by a supplier to their customer.

It is basically a record of goods received by the buyer.

It helps the buyer verify that the goods received are as they were ordered.

The Store staff receives the goods and compares them against the Purchase Order to determine if the order sent is correct.

They also physically examine the goods to check that they are in good condition.

Once the department is convinced that the goods received are as ordered and in good condition, they issue the Goods Received Note.

ALSO READ: A Guide to Avoiding Understocking and Overstocking

In case there is a mismatch with the specifications or number of the products or they arrive in a damaged condition, the buyer may reject the consignment.

A GRN is only issued against goods that are accepted; in case they are rejected, the company will create a new purchase order, and send that to the vendor.

The Store department is tasked with the responsibility of issuing the GRN, which is prepared in multiple copies.

While one is retained by the Store, copies are sent to the Procurement and Accounts departments, and one copy is sent to the supplier.

Uses of Goods Received Note

Let’s now look at the importance of goods received note.

A GRN is goods delivery confirmation tool for buyer and seller and is applicable in several cases.

As both parties retain this document, it can serve as a mediation tool in case there is a dispute in the near future.

ALSO READ: Why Safety Stock is Important?

1. Validating Quality and Quantity of Supplies

The supplier delivers goods on the assumption that the products delivered are as per specifications of the purchase order, and up to the quality standards demanded.

However, the customer will want to check for himself before accepting the supplier’s word.

Therefore, once the goods are received, the Store employees will check the purchase order to determine if the quantity and quality of goods is as specified.

Once they are satisfied everything is in order, they issue the GRN to the supplier and other departments to confirm that the quantity and quality delivered are as per the specifications demanded.

This way, the customer cannot claim at a later date that there was something wrong with the order.

ALSO READ: A Detailed Guide To Stock Keeping Unit (SKU)

2. Quality Control and Issue Management

Supposing that the procurement department or Stores realize that there is some problem with the products at a later date, but they had not pointed it out at the time of receiving the goods.

They may want to convey this to the supplier, but a look at the GRN will show that the goods were in working order.

Now it is up to the supplier; if he wants to, as a show of good faith, he may replace the goods.

Though he would be well within his rights to refuse.

3. Validation of Invoices during Three-way Matching

Three-way matching is very useful when you want to minimize fraud in billing, regardless of the size of your organization.

In this method, the goods received notes supply request notes, and invoices from suppliers are compared.

Together, these documents can help in confirming that:

• Supply request note shows the quantity and quality of products requested by the customer
• Goods received note shows that the supplies were delivered as per the specifications of the customer
• Supplier invoice shows the price and quantity of goods delivered to the customer as had been agreed upon.

This method helps in detecting anomalies and identifying fraud in invoicing.

ALSO READ: Credit Note Vs Debit Note

4. Managing Inventory and Updating Stock Levels

A GRN is a document which confirms that a company has received and accepted the goods they requested as per the specifications in the purchase order.

This has to now reflect in the warehouse data too, as new goods have come in.

A GRN, therefore, is useful in inventory management and to update warehouse stock data as new supplies come in.

5. Helps in Accounting

Goods received notes can help accountants to validate inventory balances, and make the requisite purchase entries to bring the stock ledger up to date.

It also helps to track and manage the account’s payables.

They can also subtract the rejected or non-received items, and calculate the amount due to the vendors.

Goods Received Note Format

A typical good received note contains the following fields so that complete delivery information can be depicted:

• Supplier’s name and address
• Delivery date and time
• Products received details like name, quantity, description, price, etc.

The GRN is signed by the Store manager of the company receiving the goods, as well as by a representative of the vendor if the vendor is not available.

ALSO READ: Demand Forecasting and Its Importance

What is the Process of Issuing a GRN?

Goods received note helps to make the procurement process more efficient in the delivery stage.

• The purchasing company receives the invoices
• The goods are unloaded at the company warehouse under the supervision
• The goods are physically verified to ensure that quantity and quality is as per specifications. Random pieces may be selected for quality testing
• In case there is a shortfall or the quality is not up to the standard, the supplier is informed
• On verifying that the goods received are as per the quantity and quality requested, the Store manager issues the GRN and signs it, issuing to the relevant departments and to the vendor.

The Accounts department updates the store ledger account on receiving the goods received note.

A GRN is solid proof of the goods being received by the customer.

It is helpful in maintaining inventory records, and helps to make sure that a sufficient quantity of goods is available for production or sale.

ALSO READ: A Detailed Guide to Stock Status

The Benefits of Goods Received Note

Now that we know what goods received note means, let us take a look at the benefits provided by this document.

A GRN shows the date and time that you took delivery of the goods, as well as the full address of the place from where the goods were loaded for delivery.

A properly created GRN will help your company in different ways – however, do bear in mind that it’s not a substitute for an invoice.

1. It Helps to Avoid Legal Issues

This note mentions all the important information related to a specific consignment of the goods, which forms the basis for calculating the dues owed to a vendor.

This can help you avoid legal issues in the future.

This makes it critical to track and store the document for the future.

ALSO READ: What is Capacity Requirement Planning?

2. Acts as Internal Proof of Goods Received

A GRN is issued to relevant staff members once goods or services are taken delivery of, and hence forms an internal proof of receipt.

In fact, the GRN process is also necessary when you have to make statutory reports to the Customs and Excise departments.

They hence help in maintaining compliance with such regulations.

A goods received note usually has a commodity code and an inclusion indicator.

3. Show the Supplier Details

A GRN is an official and legal document that verifies that an order has been received, which is issued by the purchasing company after confirming that the goods have been received as per specifications.

It is accepted in a court of law as proof of delivery.

The goods received note mentions the supplier’s name, address, and contact details, so that there is no ambiguity regarding this.

It shows the date the goods are received, along with the type of products delivered and all the relevant details.

ALSO READ: Make to Order vs Make to Stock

4. Helps the Accounting Process

As we saw earlier, goods received note helps accountants in reconciliation of purchase and inventory ledgers and to verify the inventory balance.

It helps them keep track of the accounts payable.

5. They Help in Monitoring Stocks

This document is a record of goods physically moving into the company’s warehouse; warehouse managers are better able to plan and track the inventory of the ordered or produced materials.

It thus serves as an important inventory management document.

ALSO READ: Reasons to Move PLM to the Cloud

Common Problems with GRN Processing

As in everything else, there are some hiccups associated with the processing of Goods Received Notes:

• Paperwork tends to get lost or misplaced, making it difficult to compare it against the original purchase order
• Time-consuming process, ties up staff in administrative tasks
• When damaged or incorrect goods are received, disputing them becomes problematic
• Costs incurred due to receipt of damaged goods, wrong quantity, incorrect prices, or duplicate orders
• Issues with managing vendors and supply chain problems, like the effect of repeat orders caused by invoicing problems and approval for payment
• Necessitating effective and timely communication with vendors regarding problems with the delivery
• Matching stocks received against several purchase orders for different departments
• Time and effort spent in responding to queries from vendors seeking payments

ALSO READ: Difference Between Procurement And Purchasing

With a robust ERP solution like Tranquil, you can automate all these processes thanks to its feature-packed inventory management module. Now you can free your employees from these time-consuming and cumbersome administrative tasks, and divert them to more productive tasks. The automated document management feature will also ensure that the process is completed quickly and without errors. If you are unsure about how Tranquil ERP can benefit your business, do schedule a demo with us. We will walk you through the solution and explain the working. Our executives will be happy to answer any queries you may have for us.

 

Inventory management is a critical function of any business and has to be executed efficiently for business success and growth.

The larger the business, the more complex it becomes, and the more attention it demands.

Uncertain demand predictions and rapidly shifting costs add to the problems.

A possible solution to this situation could be vendor managed inventory or VMI.

ALSO READ: Important ERP Modules and Functions

What is VMI?

Under the vendor managed inventory approach, a company outsources the maintenance of their stock levels to their vendor.

This means no more guesswork and forecasting required, and time in hand to focus on other business functions.

VMI can help businesses streamline every phase in the supply chain and boost financial performance.

It forges close ties between businesses and vendors, as putting a third party in charge of your inventory includes having great trust.

ALSO READ: Influence and Importance of ERP System in Different Industries

Benefits of VMI

Everyone involved in the supply chain can enjoy certain benefits under this system.

Let’s see in detail:

VMI Benefits to the Customer

The last element of any supply chain is the customer – who can be a business too – who is the product user.

They don’t control the supply chain but are critical because the chain can fail if the customer doesn’t buy the product.

Let’s see the benefits customers get:

1. Enhanced Customer Experience

With the right inventory level at all times, you can fulfil customer orders every time, which makes their purchasing experience much better.

Positive experiences turn customers into your brand advocates and can get you more business.

ALSO READ: ERP Software to Enhance your Purchase Management

2. Transparency

Today’s discerning customer is interested in knowing where their product comes from and how it was made – which is why the fair market, sustainable, and organic products are in demand.

This shift is pretty recent, and retailers may be unable to answer these questions.

With a vendor managed inventory, they have more transparency regarding the origin of their products

VMI Benefits to the Retailer/Distributor

1. Never Face Stockout

Retailers have to always balance their act – excess inventory means more holding costs, too less and they lose sales.

The vendor often has better visibility into the retailer’s stock and can make small deliveries so that you don’t get stocked out.

This means you rarely miss sales.

ALSO READ: Guide on ERP in Production Planning

2. Streamlined Processes and Reduced Costs

Excessive inventory can tie up funds and space in your warehouse, while less stock means the risk of losing sales.

In a vendor managed inventory system, purchase orders can be auto-generated, avoiding manual errors in data entry.

Also, the supplier has substantial efficiency as more precise and updated data is used for processing orders, which helps retailers to:

• Decrease the general number of orders
• Reduce the number of expensive urgent orders
• Eliminating returns due to replacing products

3. Higher Inventory Turnover

As the vendor is ready to push small deliveries, the retailer need not stock a lot of products to meet consumer demand.

Reduced inventory cost means a better inventory turnover ratio.

This also leaves more money in the hands of the business, and this can be invested in activities like research, marketing, purchasing new equipment, hiring more employees, etc.

With the vendor delivering inventory based on actual demand in real-time, they share the inventory risk with the buyer, who has almost the exact stock levels that they can sell.

4. Improved Sales Figures

The VMI process can give suppliers a greater understanding of actual consumer demand.

This means they are better placed to respond to the present conditions and future plans of consumers and can improve the service it provides to customers – resulting in increased sales.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

VMI Benefits to the Manufacturer

1. Better Forecasting Ability

The manufacturer may find it tough to predict how much to produce; of course, it depends on the likely quantity their customers will buy.

But this information can be hard to come by when there are retailers and distributors between producer and buyer.

However, in a VMI solution, the whole supply chain is connected, and the producer has direct visibility into the sales statistics of the retailer.

This helps them make accurate predictions, and are prepared to meet retailers’ demands when they need it.

ALSO READ: What is Negative Inventory?

2. Precise Ordering and Fulfilment

Order fulfilment is critical for manufacturers.

They have to manufacture the right product, send the right product, and make the right quantity – else they could lose a lot of money.

As VMI digitizes and streamlines the processes, it can help eliminate the errors of ordering and fulfilment that occur in conventional supply chains.

Common VMI Benefits

There are certain benefits which are commonly shared by all the elements in the supply chain.

1. More Stability

A problem with a single link in the supply chain can affect several others.

If a company has to produce goods for a single customer to fulfil their emergency demand, their other customers will face delays.

In a VMI supply chain, everything is linked and the risk of huge disruptions is greatly reduced.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

2. Better Alignment of Inventory and Customer Demand

This is the single biggest of vendor managed inventory benefits.

With the supplier in charge of product replenishment, they can adjust inventories according to consumer demand.

The entire supply chain responsiveness to factors like innovations, special promotions, and seasonal changes can be significantly improved.

Suppliers can coordinate lead times of producers as the demand variability effects can be handled better.

On the other hand, suppliers only need to stock minimal inventory – no stockouts or high costs.

ALSO READ: Ways to Improve the Procurement Process?

Disadvantages of Vendor Managed Inventory

• You have to let go of your control over your inventory to an outsider which may be uncomfortable, and create security issues
• Partnering with a vendor for VMI could create problems in your supply chain if you are unhappy with their service
• This is not an ideal option for businesses who have the expertise in handling demand fluctuations for your products. While the supplier will factor in your insights, it may not always reflect market shifts

These are the most commonly experienced vendor managed inventory advantages and disadvantages.

You need to weigh these, and also look at how it differs from the conventional method.

Is Vendor Managed Inventory Right for You?

The main aim of the VMI approach is to ensure that the distributor or retailer only stocks what they can sell.

Remember, for this to work, the vendor and retailer must have excellent communication between them.

Of course, the availability of VMI software today makes it easier than earlier.

While it is an effective strategy for a number of businesses, it is not necessarily the best thing for everyone.

ALSO READ: Tips For Efficient Stocktaking

Take a look at the following factors and then decide:

Product Type

Are your products perishable or long-lasting?

Do you have a wide product mix or a handful of major sellers only?

If your inventory process is complicated, you might be better off with some help in that regard.

Demand

Think if your customers keep changing preferences or if you face seasonal demand.

Understanding market fluctuations is not as simple as it seems.

In some instances, the business owners may be the best judges; in others, the vendors may be seasoned veterans who are able to figure out more accurately what the business needs.

ALSO READ: Detailed Guide to Batch Tracking

Your Inventory Management History

If you have managed your inventory yourself till now, how often have you had to face stockouts and lost sales?

How much of an impact did it make in monetary terms?

How much dead stock have you ended up with, and how much slow-moving inventory?

How much did it cost to store, insure, handle and secure those goods?

If such incidents have happened once too often, it means your track record isn’t too great.

You could try outsourcing it for better results.

Vendor Reputation

For your VMI solution to be successful, the vendor also has to be good. It is imperative to know your vendor’s reputation and background.

Check if others in the industry have used their services, and get their feedback.

Have a detailed discussion with the vendor to evaluate if he is a good fit for your business.

Check if there is a single point of contact who you can approach.

Vendor managed inventory is an economical method of inventory handling, and you can certainly gain a lot if you find that it will be a viable solution for you after weighing all the factors mentioned above.

ALSO READ: HCM vs HRM

Implementing a Vendor-Managed Inventory Strategy

Supposing you have decided to go ahead with this strategy, here are the steps you need to take:

1. Calculate the ROI

See if you can define the business value of the VMI.

Like, if you decrease your inventory by x percentage, what would be the effect on your business?

If you never got stocked out, what would be the increase in sales?

Answering such questions will help you calculate the returns you can get on your VMI investment.

ALSO READ: Detailed Guide on ROI on ERP Implementation 

2. Communicate with Your Vendors

You need to communicate and collaborate with vendors; improve your relationship with them so that you are clear about each other’s requirements.

3. Get the Right Technology

Last, you need the ideal technology.

Though conventional VMI solutions based on EDI tech have been around for a while, modern solutions like are more user-friendly, feature-packed, and robust.

Getting the Most from Vendor-Managed Inventory

Implementing a VMI process can be quite a disruptive change for everyone involved.

There are several tactics you can employ to make sure you get the maximum benefits from this system.

ALSO READ: What is Business Process Improvement (BPI)?

Here are some tips to remember:

Develop a Good Data-sharing Process

It’s essential for customers and suppliers to be on the same page for the VMI to be successful – and tight data integration is critical here.

Typically, vendors deploy their own inventory management solution at their supplier’s location so that they can directly monitor the inventory status, and analyse the data collected to enhance responsiveness while helping customers to identify areas of cost-cutting.

The customer can share historical sales data and demand forecasts to simplify the process and increase efficiency.

Both parties can deploy compatible systems and have stringent protocols for protecting customer data.

Establish Clear Goals

Both parties must define their goals clearly, and each has to understand the other side.

Goals must be realistic, and the parties need to understand that a few hiccups in the initial stages are natural.

ALSO READ: Product Bundling in Inventory Management

Get your Team on Board

With VMI, your employees are freed from managing inventory, but they should not be completely kept away from the process.

It’s a good practice to have a trained team, dedicated to support the process.

They can monitor performance, identify areas of improvement, and check for any missing links that need to be fixed.

ALSO READ: What is Batch Picking? 

At Tranquil, our ERP solution comes with a robust inventory management module which helps you manage inventory efficiently and cost-effectively. It is flexible and scalable, and secure too. Book a demo to see how Tranquil can help your business. Our team will explain everything, and answer any query you have.