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The accounting field, like most others, has undergone radical transformation today thanks to the advent of technology, and the increasing regulations governing the activity, spurred by spiraling cases of fraud and scams.

Hesitating to adopt tech or failing to comply with changing regulations can create a mountain of problems for your business.

Risk of fraud, threats to security, erroneous financial statements, and leaving your business open to fines, and other penalties for non-compliance with regulations are some of the problems you are likely to face.

The use of sophisticated software like Tranquil Accounting and Finance by trained accounting professionals can help you overcome most of the accounting challenges of the modern business world.

ALSO READ: Accounting Trends for 2023

What Do We Mean By Accounting Problems?

Material errors in financial statements, fraud that happens and stays undetected because of inefficient processes and poor internal controls, improper application of standardized accounting principles, non-compliance with regulations, cybersecurity risks, and so on are the common problems that can arise in accounting.

The consequences of these issues may be serious, like impacting the cash flow negatively and give a false picture of the business profitability.

The Reasons for Accounting Problems

Many problems could be caused by using obsolete accounting software; other reasons include not having firm control internally, and of course, intentional fraud.

This could happen because of an insufficient number of employees or inadequate training.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

How Can you Solve Accounting Problems?

One of the ways to tackle challenges in accounting is to use the right software that has the features to handle the accounting standards of the present and help you meet compliance requirements.

You should also ensure that you have the necessary number of accounting staff to handle the accounting requirements of your business and that they are properly trained on the software, your unique business accounting process, regulations, and so on.

It is also essential that the management must convey the company values, ethics, and expectations from the accounting staff, empower them with all required information, and transparent, two-way communication.

Common Accounting Problems and Solutions

Let us look at the most common accounting problems that organizations face, and how they can be solved.

1. Revenue Recognition

Revenue recognition problems include not applying the prescribed SCOPA standards, making duplicitous revenue schemes, not accounting for consignments correctly, using estimates that are arbitrary, and shipments of third-party inventory over and above possible usage levels.

ALSO READ: What is a Ledger in Accounting? 

Solution:

Implementing a robust ERP solution that can help your organization achieve the correct revenue recognition, and providing proper training to your accounting and finance teams with regard to accounting standards in your region, to maintain compliance.

While you can continue with excel worksheets, they are not as quick, efficient, or accurate as using a software system like Tranquil.

2. Asset De-Valuation and Fair Market Assessment

It could happen that accountants may overlook or inadvertently omit to make impairment write-downs or the requisite adjustments for noting the necessary assets or liabilities at a fair market assessment.

With changing economic and business environments, accountants need to regular check basis, if asset values have been adjusted to recognize the reduction in value, along with adjusting the fair value of specific assets and liabilities.

ALSO READ: What is Asset Depreciation and Why is it Important?

Accountants need to make necessary adjustments in the journal entries and financial statements as required by IFRS and SCOPA.

Industry experts say that it was during the COVID-19 pandemic that accounting issues suddenly increased, because of the prevalent economic conditions and backlogs in supply chains.

Solution

It is imperative that accountants are properly trained so that the correct values of assets and liabilities are recorded, adhering to SCOPA requirements; they should also mention these in the annual financial statements so that there is no risk of non-compliance.

ALSO READ: Importance of Cash Book in Accounting

3. Payroll Errors

Manual calculation of payroll, benefits, deductions, taxes, etc. can lead to several errors.

When paychecks are not calculated correctly, especially if you end up paying employees lesser than what is truly due to them, it can impact the morale and productivity of employees negatively.

Solution

You can outsource your payroll to an experienced third-party service provider, or implement a robust accounting software like Tranquil.

It can help you record the correct number of billable hours logged, and calculate the correct wage due to each employee.

You will also be able to comply with tax regulations as the software will compute the tax owed precisely.

You can generate reports as per categories you set – department wise, designation-wise, taxes deducted etc.

It also ensures that you remit taxes on time.

ALSO READ: Debit Notes vs Credit Notes

4. Cash Flow Statement

There could be classification errors in the cash flow statement, like improper classification to the activity type for interests and dividends both paid and received.

Interests and dividends received are operating activities while dividends paid are classified as financing activities.

Solution

Accounting professionals must be properly trained and stay on top of changing regulations so that they are able to prepare cash flow statements accurately.

ALSO READ: A Complete Guide to Cash Flow Analysis

5. Obsolete Accounting Software

Your legacy software is likely to be inefficient, without giving you data or insights in real-time; this means poor visibility into your processes like marketing and sales, and reliance on manual work and paper trails for recording business transactions.

Further, you may also find it difficult to maintain compliance with regulations.

Older systems are likely to be on-premise installations, which can be inefficient, and be more IT resource-intensive for updating and fixing of glitches on the premises.

With work situations increasingly including remote and hybrid employees, these systems are no longer suitable.

ALSO READ: What Do You Mean by Bank Reconciliation?

Solution

Implement modern, cloud-based, scalable ERP systems with feature-rich accounting modules, which will help you attain the following:

• Automation of regulatory compliance, AP, and international mass payment software
• Accurate forecasts, planning, and cash flow management
• Pay as you use model
• CRM or similar software that can help in tracking your sales funnel more efficiently
• Data visualization technology for BI and analysis of data

6. Inadequate Financial Analysis

Without the right analysis and ideal accounting systems, accounting teams may take up precious time in mundane activities like a book closing, having no time for more important work that could add value.

By performing financial analysis, you can calculate ratios, identify and handle emerging trends, and facilitate informed decision-making for upcoming opportunities.

ALSO READ: Job Costing – Everything You Wanted to Know About

Solution

Implementing robust, cloud-based ERP like Tranquil which automates and streamlines your accounting processes and performs financial analysis will help in overcoming these deficits.

You can get dashboards that display real-time updates of your key metrics, like trend analysis; you can augment this with data visualization software for data analytics or use the inbuilt analytics in Tranquil ERP to generate automated reports for your company data.

7. Lack of Internal Control

As a small business, you may not have the manpower to enable the allocation of separate employees for various tasks to facilitate strong internal control.

Your accounting systems might therefore be vulnerable to duplicate information recording and fraud.

ALSO READ: Everything You Need to Know About the P2P (Procure to Pay) Cycle

Solution

Where it’s not possible to separate duties, ideally the business owner must be involved in approving, in the form of a reviewer of vendor invoices, and also a second signatory.

Finance and accounting teams requires adequate human resources and software to be able to execute their duties effectively and achieve the desired results.

Unfortunately, sometimes, they do not get the resources they require.

8. Custody of Assets

This includes assets recorded in the balance sheet, and those not yet recorded, like cash that is yet to be deposited.
Inventory must be managed properly so that there is controlled access for receiving, storage, custody, and so on, and it must be verified against book records via physical counting.

This also applies to office equipment like furniture, computers, printers, etc.; they must be tagged and counted and tested for possible loss in value that may necessitate a write down.

If there are any discrepancies in fixed asset balance, it could be because the physical count was erroneous.

A cutoff date must be established to record purchases of fixed assets.

If you notice any unrecorded assets, record them immediately by looking up the purchase invoice; in case of the non-counting of an asset, you need to verify if it was disposed of.

The difference between the book value of fixed assets with accumulated depreciation and sale value should be recorded correctly, noting the loss or gain in the sale; if any fixed assets are missing, they should be written off.

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

9. Fraud

Improper internal control, employees colluding with one another to embezzle company finances, manipulation of accounts – these are unfortunately not so uncommon occurrences.

Solution

By implementing modern, secure, and cloud-based ERP that automates your business processes, you can easily catch errors and frauds and nip them in the bud.

Variance analysis can help you investigate the causes for differences between budgeted expenses and actuals.

By carrying out a three-way document verification, analysis of vendor master files, and validating vendor authenticity, you can further strengthen control and minimize risk of fraud.

Always try to segregate duties and tasks of employees: for example, recording transactions, and controlling assets must not be assigned to the same employee.

10. Regulatory Non-Compliance

From data privacy, and security to taxation and sanction lists, there are a number of regulations that every organization has to comply with in each country they operate in.

Non-compliance with regulations can result in huge fines and imprisonment and can spoil your reputation, hitting your business hard.

Solution

Your employees, especially accountants and Finance professionals, must be well-versed with regulations that apply to your company and industry.

Make sure they are trained and familiarized with regulations, as well as company values, goals, and ethics.

They should be made to feel that they are also responsible to uphold the image of the company in public.

Again, the right software will also help.

ALSO READ: What are Backorders?

Using Automation to Solve Accounting Problems

Many of your accounting problems can be resolved, and your accounting processes be made more efficient by implementing the right automation software like Tranquil.

Automation delivers a range of benefits to businesses like ensuring compliance, increasing accuracy, saving time and resources, quicker invoice processing, ensuring timely receipt and payments on accounts, accurate payroll calculation, deciding on discounts to be offered, improved forecasts, enhanced cash flow management, helping deliver better customer service, and the like.

With cloud-based ERP solutions, you can also choose subscription billing so that you pay only for what you use.

ALSO READ: Detailed Guide on ERP in Production Planning

Tranquil Cloud ERP has a robust Finance and Accounting module that helps you do all of this and more, at a budget-friendly price. Do schedule a demo at your convenient time to see how Tranquil can help you resolve or avoid the most commonly encountered accounting problems. We will be happy to answer all your queries.

 

If you are a manufacturer or want to start a manufacturing business, a Bill of Materials is a crucial document that you must know about.

What Is a Bill of Materials (BOM)?

A bill of materials is a detailed list of raw materials, parts, and directions needed for the construction, production, or repair of goods or services.

It is normally present in a hierarchical arrangement, with the finished product at the highest level, and materials and individual parts at the lower levels.

ALSO READ: Why Do Businesses Need Purchase Requisitions?

Understanding a Bill of Materials

A BOM is like an instructional document that is used in the production of goods, and it lists everything that is required to manufacture a product.

You could say that the process of product manufacture and assembly begins with creating a bill of materials.

Making a proper BOM is essential as it helps you make sure that all required components are available when you need them.

This guarantees a smooth and efficient assembly process.

With an erroneous bill of materials, your production may get halted, spiking operational expenses; after all, you need time to find the missing components, begin the next manufacturing order, or to figure out the right assembly process.

There are various types of bill of materials, based on the specific business requirements and project type.

Today we will take a detailed look at BOM – types, what it contains, its advantages, and more.

ALSO READ: Challenges Facing Purchasing and Supply Management

Bills of Materials Display Structure

The information in a BOM is displayed either as an explosion or implosion.

Where the highest-level assembly is cut up into individual parts at the lower levels, it is called an explosion display.

Conversely, when the individual parts at the lower levels are linked to the highest-level assembly, it’s called an implosion display.

ALSO READ: Make to Order vs Make to Stock

Let’s understand this with the help of an example: A car can be exploded into brakes, gears, clutch, steering wheel, seats, indicators, headlights, and so on.

The requirements for the ABS can be imploded into the requirement for the brakes; the chips, control units, and so on can be imploded into the sensors; together, both (along with other components of course) can be imploded into the requirements for the entire automobile.

Structure of a BOM

The structure of information displayed in a bill of materials follows a hierarchy, and the finished product is usually showed on top.

The document includes the quantity and cost of each material or part, descriptions of those parts, product codes, and any additional specifications.

The most commonly used methods to represent information in a BOM are single-level and multilevel.

ALSO READ: What is ABC Analysis in Inventory Management?

1. Single-level BOM

As the name suggests, it only has one level; it’s a simplistic list of each assembly or sub-assembly which is displayed once along with the respective quantities for each product.

Basically, it goes through a single level of assembly to result in a finished good.

It’s easy to create and is suitable for parts, or between assemblies and sub-assemblies.

In the event of a product failure, it can become difficult to identify the parts that have to be repaired or replaced, when you have a single-level BOM.

ALSO READ: What is Physical Stock Verification?

2. Multilevel BOM

This is more time-consuming and cumbersome to develop; however, it provides more details and specifics regarding the parent and child components.

The total quantity of materials needed is mentioned, with the product structure displaying the relationship between parent and child, and between assembly and sub-assembly.

It shows multiple assembly levels before the finished product is ready.

A bill of materials forms the basis for manufacturing planning systems, as the information contained in it includes the fundamental data for resource planning, material provision for manufacture, product costing, plant maintenance, and similar business processes.

In other words, it brings together all the information necessary for building the final product.

Ergo, is used in several departments in addition to manufacturing – design, materials management, and so on.

ALSO READ: Tips For Efficient Stocktaking

Types of Bills of Materials

BOMs are needed not only to build products but also when you need to order replacement components.

It minimizes chances of errors or other issues when you need to repair products.

You can plan better and be more accurate when it comes to procurement orders.

Three main BOM types are engineering, manufacturing, and sales, and then a few other types which are not used by all businesses.

ALSO READ: What is Product Bundling?

1. Engineering BOM

This document describes and details the finished product design, and contains assemblies and parts designed by the engineering department, along with every alternative and substitute component numbers as shown in the diagram notations.

In every line of the BOM, you will find information like product code, name and number of the part, its revision, the product features, description, UOM, quantity, measurements, weight, and any other specification as required.

The Engineering bill of materials is usually created by engineers using a CAD diagram, and there are often multiple BOMs for a single finished product.

This document displays the parts structure from a functional viewpoint.

ALSO READ: What Is Cloud Data Protection?

2. Manufacturing BOM

This lists every component, assembly, and sub-assembly necessary for the production of a finished product that can be shipped; this means it includes packaging materials that are needed to deliver the item to the end user, or customer.

It mentions the processes that need to be carried out before the product is completed, and has every bit of information needed for all activities connected to manufacturing.

In other words, information regarding components that have to be processed before assembly, with an explanation of how the different parts are connected to one another.

It is an important element in the management of the product’s lifecycle.

This BOM is shared with ERP, materials requirement planning, and other business systems which are utilized by the organization for the procurement of materials and manufacture of the final product.

ALSO READ: Difference Between Procurement And Purchasing

3. Sales BOM

This document contains details of the product before assembly in the sales stage, and the list of finished goods and parts needed for its production are mentioned distinctly in a document called the sales order.

The finished goods are managed as sales items instead of inventory items in this BOM.

Though there is a typical structure for a bill of materials, there are likely to be slight variations in each type of BOM when it comes to how much detail it contains and the variation in structure.

While Engineering BOMs are more likely to list components that perform a specific product function, a manufacturing BOM will list every item that is required to manufacture that product.

There are other, less common BOMs:

4. Configurable BOMs

If you manufacture highly customizable products, you need configurable BOMs as they will help you fulfil tailored specifications of customers, and identify the raw materials, materials for labeling, packaging, and so on.

Assembled computers, automobiles, and certain hardware or software are examples where such BOMs may be necessary.

ALSO READ: ERP Configuration vs. ERP Customization vs. ERP Personalization

5. Production BOM

This is essentially the earlier half of the manufacturing BOM which contains a list of parts and subassemblies required to product the parent item, and forms the foundation for a production order.

6. Assembly BOM

As you may have guessed, this is for the latter half of the manufacturing BOM where the parent product is listed as a sales item instead of an inventory item (similar to a sales BOM)

ALSO READ: Understanding Different ERP Systems

7. Template BOM

This is just a standard list of parts for products that require regular servicing.

The parts denote the sub-parts of the object to be serviced.

This BOM is useful in tracking the sub-parts that were replaced, repaired, or services.

8. Software BOM

This BOM is used by software development firms to list what tools and technologies are required to build certain software systems.

This could include backend technologies, extensions, frontend technologies, databases, programming languages, and so on.

These BOMs help developers to make sure that various software elements are secure, updated, and can function together cohesively.

ALSO READ: Top Trends of ERP System For The Future

What Do You Need to Create an Effective BOM?

Now that you’ve seen what is a BOM, and what types are there, let’s see how to build one:

• Different level numbers signify where the part fits in the hierarchy of the BOM
• Part names provide information about them and help in identification
• Part numbers are a shorthand method of parts identification as they denote information about the part. These are similar to SKUs used to identify product variants and are hence also called intelligent part numbers. Intelligent numbers have alphabets that signify something specific; non-intelligent numbers have just serial numbers which carry no further meaning.

ALSO READ: What is SKU Rationalization?

• Manufacturer’s names also help in parts identification
• Part phase helps identify the specific phase of the product lifecycle where the part is used – design, revision, and so on.
• Quantity indicates how much of a part is required, along with a UOM for each type of part, like a number, grams, liters, and so on.
• Alternatives signify if a component can be changed for another in case the original is not available.
• Description of each component which enables the differentiation among similar components by measurements, colors, and so on.

ALSO READ: Guide on Stock Adjustment and Stock Transfer

• Priority analysis which describes crucial components and helps in the prioritization of their purchase; like, parts that are more expensive and take more time in reaching, may be prioritized.
• Procurement specification defines the manner of purchase and manufacture of parts.
• Notes and/or comments to record unforeseen changes and notes of the project progress, including diagrams or pictures of assemblies and parts.

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

What are the Advantages of Using a BOM?

A bill of materials brings greater accuracy and efficiency to the manufacturing process, by laying out an in-depth strategy and design which your teams can follow with ease. When a BOM is well thought-out and developed, it can help in:

• Records maintenance
• Monitoring and planning materials requirements
• Controlling budgets
• Planning raw materials procurement
• Estimating cost of materials
• Inventory management
• Sticking to a time-table or schedule
• Being on top of shortage of materials, speeding up charges, and managing downtime efficiently whether planned or unexpected
• Wastage reduction
• Recognizing the reasons for the failure of products
• Quick replacement of defective parts
• Identification of software components’ vulnerabilities
• Enhancing the security of your supply chain.

Additionally, bills of materials help to make sure that third-party contract manufacturers are being effective and accurate in their production.

BOMs are very useful for businesses that implement lean production methods and processes that are based on continuous improvement.

The chief aim of lean manufacturing is waste reduction, and a BOM provides a roadmap that helps you in achieving that.

ALSO READ: HCM vs HRM

As a manufacturer, a bill of materials is absolutely essential; but it may be a bit tiresome for you to have to do it from scratch for every product. This is where Tranquil Cloud ERP comes in. Our cloud-based business software has robust inventory management, procurement management, and production management modules that will automate and streamline all the mundane tasks you have to perform, and ensure greater accuracy, efficiency, reliability, and productivity. This goes for the Bill of Materials too. To see for yourself how it works, schedule a demo of our software right away!

 

Have you ever really wanted to buy a product, either from the physical store or online, only to be told that it is sold out? I’m sure most of us have faced this frustration at some time or the other.

On the one hand, it signifies high demand and sales for the business, but on the other, it can lead to unhappy customers and lost sales – it could even translate into lost customers.

Which is why, preventing or minimizing the possibilities of stockouts should be a priority for businesses who want to retain customers and keep them happy, and increase their revenues.

ALSO READ: Effective Inventory Restocking Methods

What Is an Inventory Stockout?

As the name suggests, a stockout simply means that a particular item or items are no longer in stock because they got sold out, and hence are unable to meet consumer demand for them.

Stockouts can occur at any point in the supply chain, for a number of reasons.

Delay in delivery of raw materials by the vendor, unforeseen demand spikes, inefficient inventory practices, and so on.

It is essential that the status of the availability of the product is reflected across every sales channel when a stockout happens.

This way, you can at least prevent customers from placing orders or adding to their carts.

In case the customer does place an order, pays, and then the system shows that it is not in stock.

You should be able to offer a satisfactory resolution to the customer like a refund, an alternative item, or a promise to dispatch the product as soon as it is back in stock.

When you are upfront with the customer, they will appreciate the fact and will be more likely to stick with you.

ALSO READ: What is an Inventory Control System?

Why Do Stockouts Happen?

The most common reasons for inventory stockouts are lack of planning and human error; however, circumstances outside your control can still cause this situation regardless of how prepared you are.

Let’s see them in brief:

1. Wrong Forecasts

Incorrect predictions are bound to lead to either overstocking or stockouts.

It is critical that your demand and inventory forecasts are as accurate as possible so that either situation is avoided.

With precise forecasting, stock shortages or excesses can be minimized even if there are unexpected shifts in demands or problems in the supply chain.

2. Incorrect Records

Not counting properly, or entering the incorrect number during manual inventory management of misplacement of items that were delivered to the warehouse, etc. are the main reasons for incorrect inventory counts.

Sometimes, technical problems also cause improper counts; especially when a business has several sales channels but inventory is not updated across all of them in real-time.

ALSO READ: Common Inventory Management Mistakes to Avoid 

3. Vendor Delays

Delays from the supplier, like delivery delays of raw materials or parts, can cause delays in your production; delays in delivery of finished goods cause stockouts and an inability to fulfil consumer demand.

4. Manufacturing Issues

Shortage of labor, machinery downtime or inefficient planning can also cause delay in production in addition to vendor delays, leading to stockouts.

ALSO READ: Why Do Businesses Need Purchase Requisitions?

5. Logistics Problems

External circumstances like calamities, riots, etc. can damage production facilities, raw materials, and finished goods; vehicular accidents or breakdowns can lead to delays in delivery, while mechanical problems can delay production schedules.

These are not in your control but if you face frequent issues with vehicles, you may need to investigate the causes and resolve the issue with maintenance and overhauling.

How Can Businesses Prevent Stockouts?

The consequences of stock out in inventory management can be far-reaching and include lost sales and customers, bad reviews, and a dent in the brand image.

While several matters are out of your hands, you can implement some best practices to prevent or minimize the occurrence of these events.

ALSO READ: Difference Between Procurement And Purchasing

1. More Accurate Inventory

Regular tracking and updating of stock-level records are crucial, but doing it manually can cause errors.

However, if you use Tranquil inventory management software you can automate this process so that updated data can be shared across the organization and all sales channels in real time.

2. Implement an Effective Counting System

Closing operations to take a complete inventory count is impractical – though you may get an accurate figure, you lose sales for that day.

Instead, a cycle counting system, where you count and check a specific set of SKUs as scheduled, is likely to be more efficient and valuable.

Your inventory department can carry out audits and verify if physical counts match the records in your inventory system or spreadsheets.

ALSO READ: Ways to Improve the Procurement Process

3. Set Reorder Levels

It is imperative to order in time to prevent or minimize stockouts.

A reorder level is the inventory level (in terms of weight or number) at which you must place orders for replenishing that item so that you don’t get stocked out.

If you wait till the stocks go lower, you may not be able to guarantee that the products will be delivered in time to fulfil consumer demand.

By calculating reorder levels and setting alerts that are automatically sent to relevant personnel, you can manage your inventory much more efficiently.

ALSO READ: Importance of Inventory Reorder Point

4. Calculate Lead Times

Lead time is simply the time taken for an order to be delivered at your warehouse once you have placed it.

It is a crucial factor to think about when you evaluate vendors both current and potential.

Obviously, the shorter the lead time, the better, as it leads to reduced carrying costs; it’s also beneficial when you have a sharp rise in sales.

ALSO READ: Debit Note vs Credit Note

5. Forecast Better

Being able to predict consumer demand is a quintessential business craft; granted, consumer demand is prone to shift drastically and suddenly, and can render all your calculations useless.

But on average, if forecasts are scientifically made, it can help you maintain optimal inventory stocks, prevent overstocking or stockouts, and save expenses.

A reliable software system like Tranquil will factor in a wide range of elements like seasonal demand, consumer trends, lead times, and so on, and help you be more precise in forecasting.

ALSO READ: Supplier Aging vs Customer Aging

6. Do Demand Planning

Demand forecasts generally consider factors like consumer trends and cover 18 to 24 months; they form the basis of the overarching process of demand planning.

It is a step ahead of forecasting as it considers supply chain and inventory management as well.

To put it simply, forecasts are used by demand plans to craft strategies for sales and operations so that the business can plan more efficiently regarding the quantity of products to be purchased or manufactured, and when to do this so that consumer demand can be fulfilled.

Precise inventory data is critical for this to be successful.

7. Maintain Safety Stock

Keeping inventory and holding costs down being a priority for most businesses, they now favor zero inventory or just-in-time inventory methods; however, this poses the risk of stockouts unless you have vendors close by who can supply in the least possible time.

That is why it is prudent to maintain some extra stock as a buffer and prevent stockouts.

Tranquil ERP can help you calculate your ideal safety stock.

8. Integrate Inventory Platforms

To have accurate inventory figures across your sales channels, it is imperative that you sync the numbers throughout those channels.

Without that, products that are actually sold out may be shown as in stock, and a customer may place an order, only to be told at the end that it’s out of stock.

ALSO READ: How to Understand and Manage VAT for Your Business?

9. Use RFID Technology

This is a wireless technology that transfers data and enables warehouse staff to track inventory in real-time using radio frequencies.

Goods are today sent with data embedded in RFID tags attached to them, with each tag storing info that is sent automatically to a central database.

Every time the stock in and stock out happens – when products are stored, sold, picked, and shipped, this data is automatically updated; this means, the correct figure is reflected at the physical store as well as the online store of that merchant.

This reduces human error, improves inventory counts, and subsequently minimizes stockouts.

ALSO READ: What is Asset Depreciation?

10. Read Stockout Patterns

It is impossible to correctly predict consumer demand at all times; yet, you can find trends in stockouts.

With regular audits and monitoring, you can recognize when peak stockouts happen.

Let’s say the same items get sold out every month in the same week – you can either change your reorder levels, reorder quantities, or even the suppliers, to prevent this.

ALSO READ: What is Order Up to Level in Inventory Management? 

11. Study Consumer Trends

Historical data and trends are important for demand forecasts; potential and emerging trends are just as important to ensure that you have sufficient quantity on hand to meet consumer demand.

You also need to minimize fading trends to avoid dead stock.

12. Observe the Supply Chain

Raw material shortages lead to a stoppage in production, and therefore, stockouts – this can be across the supply chain and is felt hardest by retailers.

While vendor shortages can’t be stopped, they are often predictable.

Studying the trends can help you mitigate issues caused by stockouts.

Say, you track the frequency of delays or shortages by a certain vendor – you could find another one.

ALSO READ:  Guide on ERP in Production Planning

13. Build Strong Vendor Relationships

Forge strong connections with vendors and keep them appraised of your requirements, especially when you are expecting a demanding hike.

Vendors will be able to inform you if they can meet that demand or not, giving you time to find alternatives if needed.

14. Consider Consignment Inventory

If your consumer demand is volatile, think of consignment inventory to avoid stockouts.

In this system, vendors keep stock with them till the retailer sells it.

This way, products are always available when needed, avoiding the scenario of stockouts.

Retailers also have less risk as they only need to pay for the product once they sell it, and less expense as there’s no carrying cost.

Retailer-vendor communication has to be transparent and accurate to avoid sales of items sold out at the vendor’s side.

ALSO READ: Important ERP Modules and Functions

15. Using a Vendor-Managed Inventory System

In this system vendors and retailers share the responsibility of managing inventory, and a certain quantity of inventory of specific products is maintained at the vendor’s end.

Lead times, reorder levels, etc. are managed by the vendor, so that the retailer is free of that worry.

Of course, you should enter into this agreement only with trusted vendors.

ALSO READ: What is Vendor Managed Inventory and What are its Benefits?

16. Liquidate Excess Inventory

This may sound contradictory but it’s not.

By selling off excess stock, you can make space in your warehouse for items that are selling fast.

Bundle them with quick-selling products or offer them at a discount; you will reduce carrying costs and have space to order more of your best sellers.

ALSO READ: What is Negative Inventory?

While there is always a possibility of inventory stockouts, you can try a variety of measures to reduce their occurrence. One of the best things to do is invest in inventory management software like Tranquil. It will streamline your entire process and give you more accurate data, forecasts, and transparency. Do schedule a demo at your convenience to know more about how our software works.

 

In 2022, the business world witnessed several changes in the way accounting was done; these changes, while not being jaw-droppingly exceptional, have set the tone for several more innovations for the coming year.

Technological advancements are happening in every field, and we can see the increased adoption of automation.

While tech has not yet brought in the kind of sea changes it has in other fields, there is no doubt that even this arena is fast moving towards greater automation and adoption of innovative technology.

The emergence of cloud computing has increased the possibilities of adoption for accounting.

ALSO READ: ERP Trends 

Drive Towards Industry Change

In 2019, a global survey of accountants was conducted, in which over 3000 respondents participated; a whopping 905 % of them were of the opinion that by the next decade, accounting will undergo a major cultural shift.

This shift is being caused by business services, hiring practices, remote working practices, and emerging technologies.

Another surprising result of this survey was that the majority of accountants would begin to hire staff from divergent backgrounds, and those with conventional accounting backgrounds may not remain the favored breed anymore.

They also believed that in spite of the various training programs that are available for accountants, they won’t suffice to bring them up to speed with the accounting trends for the next decade.

Sounds interesting? We are sure you want to know more.

Without much further ado, let us now look at the accounting trends for 2023.

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Accounting Trends 2023

1. Cloud-Based Accounting

This is probably one of the most important accounting industry trends.

Most businesses have shifted to the cloud for business processes like ERP, CRM, etc. as they are secure, quicker, reduce downtime, and hence are more profitable.

The same goes for accounting; with accounting solutions being hosted on the cloud, more and more companies are discovering the convenience of anytime, anywhere access of their digitally hosted system.

The data access not only allows you to view the data, but also to share, edit, copy, and otherwise work on the files and collaborate, subject to your role and responsibility in the organization.

It allows teams to track inventory, sales, expenses, purchases, and payroll, among other things.

Most accountants are happy with cloud-based software as it streamlines their workflows and improves the quality of their work and organizational data.

ALSO READ: What is Job Costing?

2. Offshore Staffing And Remote Work Setup

In the pre-COVID-19 pandemic era, the percentage of remote workers was probably around 10 – 15% globally; however, this figure shot up radically to over 80% during the pandemic.

Even today, many employees prefer to work from home as it saves them commuting time, and they are more productive as the comfort of working from home is incomparable to working in an office atmosphere.

Strangely, there is unemployment among accountants in spite of the requirement for accountants being very high.

This means that several companies are missing the opportunity to hire talented accountants.

To make up for this paucity, finance professionals are moving towards technology to maximize profits for their businesses.

What emerges in this scenario is remote working or work from home.

ALSO READ: Debit Note vs Credit Note

Remote work, in combination with technology in accounting, like digitization and cloud adoption, has helped reduce expenditure significantly, and in optimizing the business progression too.

This trend has been slightly extended with companies now hiring additional employees offshore; some are deployed in remote work configurations after being hired at the office as well.

This model is putting organizations on the fast path to growth; especially for accounting forms, they are able to derive more benefits from this structure in comparison with the conventional working framework.

Based on evaluations and predictions, the offshore and remote working trend is likely to not merely exist, but exponentially increase and thrive in the foreseeable future.

3. Digitization with Accounting Software

There is increased digitization in accounting, and we will see this trend skyrocketing in the coming months.

More and more organizations prefer accounting software rather than manual systems, as the software systems are robust solutions with advanced features and user-friendly functions.

Tranquil Finance and Accounting Software is one such solution that offers numerous functions that help streamline financial accounting, reduce manual effort, minimize errors, and help to save money.

ALSO READ: Detailed Guide to Cash Flow Analysis

4. Big Data

Financial experts and accounting professionals have always depended on big data for taking critical financial decisions.

Technology has played a vital role in the transformation of important internal data sets into the secure and dynamic analysis of data.

It has always helped in converting those assessments into actionable insights.

Thanks to the slow but continuous improvements in the finance sector, there is higher possibility now than ever for data to become more proactive.

This fact is a major catalyst for the changing future of accounting.

5. Data Analytics

While Big Data has been a critical tool with immense potential for financial experts, data analytics is even bigger, with even greater possibilities.

By implementing data analytics in your accounting systems, you can instantly discover inefficiencies in operation, build precise models of forecasting, gain beneficial insights about your finances, and also stay abreast with the progress made by your customers.

By 2023, data analytics will become commonplace as there will be a burning requirement to separate different service values from challengers, and to make precise, data-based decisions, and judgments on that basis.

The main reason being that data analytics is invaluable in deciphering intricate, complicated datasets, and in recording important insights.

It is also believed by industry experts that the rules and frameworks for reliable data gain are set to undergo a significant transformation by 2023.

ALSO READ: What is Budget Variance Analysis?

6. Automated Accounting Process

Automation has radically transformed the way most businesses in various industries function, and accounting is not far behind.

Comprehensive solutions are today available for the whole management process, and this has helped in minimizing errors and bringing clarity to every phase.

As accounting automation depends on computers and servers, many businesses unfortunately get trapped into monetary scams and are vulnerable to cyber security threats.

Ergo, it is essential the auditors in the organization verify the accuracy of the data and financial inputs.

This will help the employees to feel more secure about their jobs and reassure them that they will not be replaced by bots.

ALSO READ: Everything You Need to Know About the P2P (Procure to Pay) Cycle

7. Agile Accounting

This is definitely right up there – one of the biggest trends in accounting for the future.

Agile accounting means how well you react to change and adopt the latest trends seen in the market.

If you are able to evolve rapidly, you will certainly gain a distinct competitive edge.

If you want to succeed and maintain your pole position in the market, it is imperative that you welcome new trends as quickly as possible.

But how can you apply the Agile methodology to accounting?

Agile Accounting Means:

• Managing your time efficiently so that you are able to respond to unexpected changes quickly
• Defining goals and working towards them
• Planning sprints for each fortnight
• Analyzing the successes and failures of every sprint
• Taking advantage of the latest technologies and trends
• Increasing your workforce through means like remote workers, offshore hiring, and more
• Leveraging cloud-driven solutions to have secure, flexible access,

In short, you need to be proactive and be ready to handle anything that the market throws at you.

ALSO READ: What is Asset Depreciation and Why is it Important?

8. Outsourcing Accounting Functions

A novel method of progressing in the accounting field is outsourcing; this helps accounting firms to focus on more critical value-adding tasks and leave the petty issues to others.

When the work becomes too tedious and monotonous, businesses outsource the job to professional firms and can be more productive and increase profitability by making the best use of their resources.

In fact, outsourcing is one of the quickest-growing sectors in accounting, thanks to this fact.

Organizations are beginning to realize that they can get more reliable and accurate accounting services by outsourcing to professional service providers.

It also helps chartered accountants to provide outstanding services to their customers, adding more credibility to their firm and building trust.

ALSO READ: Supplier Aging vs Customer Aging

9. Blockchain

Blockchain has almost revolutionized accounting as we know it.

It has brought down the expenses related to ledger maintenance and reconciliation.

Additionally, blockchain technology now makes it possible for accounting professionals to have clarity and proper visibility regarding their organization’s obligations and the resource availability.

A large number of wallets are being created for blockchain transactions; in the US alone, the spend has touched 1.1 billion US dollars.

No wonder then, that it is definitely a trend that you should keep a watch on; industry experts predict that the day is not far when blockchain sees prolific global acceptance.

ALSO READ: What Is Reverse Factoring?

10. Value-Based Pricing

An accounting firm needs to understand the effect of rising charges on their business.

It can be pretty detrimental, and could even cause them to shut shop.

Value-based pricing, however, uses a tactical approach, where revenues are increased by fine-tuning the price to the amount that is anticipated, rather than its historical amount.

A value-based pricing model is ideal for delivering price certainty for accountants as well as their customers.

Additionally, accounting professionals will be able to make better use of their time and be more productive.

ALSO READ: What is SKU Rationalization? 

11. Advisory Services

It is essential for every business owner to stay up-to-date with the latest developments in their industry, the technologies that are emerging, market trends, and so on.

Savvy business owners avail the Advisory Services that guide businesses on how best they can leverage the new technologies and optimize the accounting business, or how to get the most out of their existing accounting software.

Advisory services provide accurate and valuable insights and help boost revenues significantly.

Final Thoughts

These are the trends that most industry experts predict will dominate 2023, and in the years to come in the near future.

The onset of these changes is not sudden, but it is happening slowly and steadily and creating a quiet revolution in the accounting field.

Tranquil Finance and Accounting Management Solution is a cloud-driven, comprehensive, secure, and efficient solution that helps you streamline and automate your accounting procedures, allowing you to tackle complex and value-adding tasks. Tranquil ERP is an integrated solution that also handles your inventory, sales, HR, procurement, and asset management so that you can free your resources from performing monotonous and cumbersome work. Do schedule a demo at your convenience, and we will be happy to show you how Tranquil works, and how it can benefit your business.

 

Inventory restocking refers to the way you replenish goods when you need it the most, based on current demand and sales predictions for the near future.

When properly instituted, you can make sure that you stock adequately so that you don’t miss a sales opportunity and don’t overstock and end up with dead stock and high carrying costs.

Effective Inventory Restocking

Restocking is not merely ordering products from a vendor and putting them on your warehouse shelves.

You have to have a very clear picture about various things like current use (sale of production) forecasted demand, the time it will take for the products to be delivered, and so on.

While it is a very important element of inventory optimization, it can become challenging if you can’t predict the future.

Demand shifts can take place because of festivals or seasons, influencers endorsing your product, competitors coming out with similar products, or any other reasons.

This means, anticipating these shifts is not an easy task.

You can still restock inventory strategically depending on your inventory knowledge.

ALSO READ: Top 8 Inventory Reduction Strategies

When to Restock

Optimizing the restocking cycle depends to a great extent on when and how often to restock inventory.

If you implement technology like Tranquil inventory management, you will be able to track inventory in real-time – as your inventory is likely to be continuously moving through your supply chain, and delays are common.

Tranquil will help you calculate optimal reorder levels, and notify you when stocks touch that level.

Reorder levels have to consider the lead time – the time taken for those goods to reach your warehouse from the time you place the order.

ALSO READ: What is Inventory Reorder Point?

What to Restock

As a retailer either online or brick-and-mortar, you have to consider how many variants (SKUs) you sell, and see what items sell quicker or more than the others.

This will help in inventory optimization and restocking depending on the demand for those products.

For example, if blue shirts of the same brand and design sell more than yellow shirts, it doesn’t make sense to stock or order 10 each of both; you may want to order 30 blue shirts and 10 yellow shirts.

If there are any variants that are very slow-moving, you can consider discontinuing them and save on carrying costs.

Tranquil inventory tracking feature gives you comprehensive visibility into inventory levels and shows where the demand is highest.

How to Restock

To know how you can restock inventory quickly and effectively, you need team support and the right technology.

Inventory restocking is not merely reordering materials; you need to think about how much storage you have, the efficiency of your receiving process, how fast you can get the products ready to be sold, and so on.

When your business is scaling up, you may need to increase your order size, but you have to think whether you have the space for the additional stock and if you’ll need major reorganization to be done.

This can take up a lot of time and resources.

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Returns

How effectively you manage your returned products also affects your inventory restocking process.

You must process returns quickly so that you understand how many of those items can still be sold, and therefore can go back on your shelves, and how many have to be returned to the vendor or discarded.

What Happens When You Don’t Restock Inventory Efficiently?

Inventory restocking is important but for growing businesses it is critical.

Weak strategies can negatively impact a business at its core.

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Inventory Stockouts

When you don’t reorder stock at the right time, you may face stockouts, and this can prove to be very expensive – especially if it happens frequently.

You may have customers cancelling orders, and hence lose sales, and end up losing the customer for good.

They may even leave negative reviews online.

There are several ways you can avoid this, and one way is calculating your safety stock; by maintaining safety stock, you can have a buffer in case of extra demand or delayed deliveries, and fulfil customer demands.

ALSO READ: Inventory Management Trends to Watch Out for

Overstocking

Inventory management methods all have a common goal – optimizing inventory levels.

This is basically a balancing act.

Overstocking is just as problematic as stockouts; while you will be able to fulfil demand, you will have too much left over, eating into your profits, tying up your working capital, hampering your cash flow, and taking a toll on your budget, and resources.

Additionally, you run the risk of ending up with obsolete stock that you can’t sell anymore.

ALSO READ: Advantages of ABC Analysis in Inventory Management

High Costs of Order Fulfillment

Poor stock management methods can also cause excessive fulfillment costs; after all, the efficiency of inventory restocking affects everything from receiving deliveries to shipping the products.

Supposing, a customer orders a few items from you but a particular item is out of stock.

Now you may have a split shipment situation, where one item may be fulfilled at a later time, or different location.

With two (or more) shipments, you incur higher shipping expenses.

If you have multi-location inventory storage, you must know where to store specific SKUs and in what quantities.

This can help you in having the correct inventory at the correct location to fulfil demand.

Shipping strategy can be optimized by maintaining adequate stock to meet demand in important locations; you can also bring down lead time and shipping expenses.

ALSO READ: What Is Gross Margin Return on Investment (GMROI)?

Effective Inventory Restocking Methods

Now that we know what problems you can face with an ineffective restocking strategy, let us see what methods to follow to prevent them from happening.

First off, it’s important to implement robust inventory management software that will help you streamline inventory, and manage orders and shipments effectively.

Automation can help in efficient inventory tracking and eliminate human errors and save time.

ALSO READ: Detailed Guide on Budget Variance Analysis

1. Periodic

This is ideal for small businesses with small order sizes.

Here the cost of goods sold and the inventory are not updated in the company’s books immediately as they happen, and goods are restocked at regular intervals like monthly, quarterly, or annually.

So, even if the inventory suddenly becomes low, restocking will only take place at the predetermined time; conversely, even if a certain item is in stock, it will be ordered again.

This is a simple method that needs little data but you run the risk of stockouts and overstocking.

Without proper data, decision-making becomes tough.

ALSO READ: What is Inventory Aging? 

2. Top-off

This is used by businesses that stock multiple quick-selling SKUs and is also called lean time replenishment.

It can ensure a high inventory turnover rate and reduce stockout risks while keeping low days sales.

Retailers restock goods to desired levels at all locations whenever there is a spike in demand.

In slow seasons, picking staff have fewer orders to fulfill and can hence be redirected towards restocking.

This method helps boost efficiency during the busy seasons.

3. Profit-based

By measuring the profitability of an SKU, you can decide whether you want to restock it, and how much to restock.

You can stock higher amounts of more profitable SKUs so that you always have enough to fulfil demand.

When you can track SKU sales and profitability accurately, you can use this method.

ALSO READ: What is a Ledger in Accounting?

4. Demand Restocking

As the name suggests, this method means restocking depending on demand forecasts for the future.

Industry experts recommend that to avoid stockout risks during demand surges, it is better to maintain adequate safety stock.

Tips for Restocking Inventory

We have established that ill-conceived restocking strategies can negatively impact your business.

You stand to lose sales, incur high carrying costs, lose customers, and experience reduced brand loyalty.

You can follow these tips on inventory restocking optimization so that you mitigate risk while fulfilling demand.

1. Inventory Management Software

Restocking becomes especially challenging when you expand your business and add more warehouses, sales channels, products, and locations.

The right inventory management software can streamline your business processes from end to end, save time and money, and minimize errors, with automated inventory tracking, providing real-time data, and overall visibility into your inventory at every phase in the supply chain.

This facilitates data-driven decision-making about restocking.

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

2. Leverage Inventory Data

Data is power. And it is critical to have this power at your fingertips.

With inventory data, you can study past trends, predict demand for the future and regulate your inventory levels based on that.

Let us say that you routinely run short of stock around the festive season; you can use data from the last year pertaining to that period, and calculate how much additional inventory you will need to maintain to fulfil the demand for the upcoming festive season.

You will also need to consider your current growth rate to get an accurate figure.

Inventory data can also be used for inventory reporting, or to decide the timing of your next marketing campaign, like a sudden sale to get rid of products nearing expiry.

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3. Conduct Regular Inventory Audits

An inventory audit is a process of verifying the financial and inventory records as in your books of account against the actual (physically counted) inventory levels, which will allow you to have thorough visibility into your inventory.

It will help you in measuring profitability, checking for inventory shrinkage, recognizing inefficiencies, and in reordering stocks accordingly.

All you need to do is just physically count the stock you have on hand, and see if the figures match what you think you have as they are recorded in our books of account.

You can streamline inventory on all levels with regard to the supply chain.

It is especially important to be clear on the kind of inventory to be bought and when it has to be bought.

By carrying out inventory audits, you can see how effective your inventory strategy has been, and you can also get a better idea about the calculation of your profitability.

ALSO READ: What is Job Costing?

Conclusion

Undoubtedly, having a robust inventory restocking strategy is crucial, especially if your business is on a growth trajectory.

How much you want to stock, when you want to replenish, from where, how often, and more, depends on numerous factors, and they differ from industry to industry, and from business to business.

You have to consider the available space, human resources, lead time, current demand, projected demand, and a whole lot of things.

One of the most convenient and quickest ways to achieve optimal inventory restocking is by implementing reliable and efficient inventory management software like Tranquil.

It provides all the data regarding your inventory that you need to make decisions.

After all, the more data-driven your inventory management, the more efficient it is likely to be.

ALSO READ: Why ERP User Interfaces are Important?

Tranquil ERP has feature-rich modules that will help you streamline other business processes too. Do schedule a demo so that we can walk you through the software and help you see how it can benefit your business.

 

While online shopping is nothing new, during the global lockdowns during the Covid-19 pandemic, this trend grew exponentially.

It was safer and more convenient to buy online.

This transformation in retail buying has also transformed how businesses operate. Companies today have to fulfil customer demands, ensure prompt delivery, and generally deliver excellent service – or else, they will simply move to the next company.

Businesses have to manage their inventory and supply chain efficiency to be able to satisfy consumer demands; eCommerce fulfillment basically means delivering the correct quantity and quality of products on the promised date. If you are not able to, you will stand to lose customers.

ALSO READ: What is Inventory Reorder Point?

What is Lead Time?

The time taken for a product to reach the customer from the time they place the order is called the lead time.

Every business must strive to shorten this time as much as possible so that they can create great customer experiences and satisfy their demands.

The longer the lead time, the more money and resources you use, and the more inefficient your business becomes.

What is Lead Time Reduction?

This is simply reducing the time taken for delivering a customer’s order from the time they place the order.

Lead time management is all about improving the flow so that the entire process becomes smooth.

This means every process from procurement through sales to shipping has to be seamless, quick, and hassle-free so that you minimize the time taken from start to finish.

Both manufacturers and retailers are today taking steps to enhance consumer access to a wider array of goods and decrease expenses.

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

Why is Lead Time Reduction Important?

Implementing a lead time reduction strategy will help you understand and manage your supply chain better, and be well-equipped to alleviate risks and improve your financial performance.

In fact, once the lead time is reduced, your risk will be negligible, and the supply chain will deliver better customer service.

Your company will be able to fulfil consumer demand and increase profitability, helping you accelerate your growth beyond what you thought possible even.

The chief objective of lead time reduction is delivering the right product to the customer at the right time and right price.

For this, you need to constantly monitor and assess multiple parameters of operations and simultaneously attempt to increase efficiencies.

ALSO READ: Common Inventory Management Mistakes to Avoid

Benefits of Reducing Lead Time

Lead time in inventory and supply chain can lead to delayed deliveries and unhappy customers.

Let’s look at the advantages of decreasing the lead time.

1. Competitive Edge

With automation in your processes, you can reduce lead time without spending much.

There are customizable solutions available, which help you save money while fulfilling production goals.

You can score over your competition by being the first to market.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

2. Gain Consumer Trust

By making improvements in supply chain, logistics, and inventory management, you can become more reliable, deliver products to customers quicker and build trust.

This will also help you to avoid stock-outs, and make use of all sales opportunities and gain new customers.

3. Increase Cash Flow

When you reduce the time taken to deliver a product to the consumer from the time you receive it from your vendor, it significantly improves your cash flows.

4. Increased Inventory Turnover

Inventory turnover refers to the number of times your inventory is sold and replaced; a high turnover means you have good sales.

Reducing lead times can lead to more orders and sales, which means your products get sold faster; this way you can avoid obsolete and dead stock.

ALSO READ: Key Steps for Successful Demand Planning 

Process Time Vs Lead Time

Process time also focuses on time, but worked on by an individual working on a specific task, and includes waiting and walking time.

Strategies that look at minimizing process time ignore many activities in the entire supply chain.

Whereas lead time is the time required from the time a customer’s order is accepted and processed through the supply chain, through production to shipping.

Strategies to Reduce Customer Lead Time

Decreasing lead time in supply chain can help you reduce customer lead time as well.

It is important to understand your supply chain well as it will help in identifying areas of improvement, especially for visibility and control.

By implementing a state-of-the-art supply chain, you can get a virtual picture about it and processing times for each section, helping you see where you can improve things and gain an edge.

ALSO READ: Advantages of ABC Analysis in Inventory Management

1. Eliminate Non-value-adding Activities

This includes waiting for information to take any action, conducting nonessential meetings, holding high inventory, moving safety stocks, and other unnecessary activities.

With proper planning, you can ship and deliver customer orders quickly and consistently.

Tranquil ERP has robust inventory management software that helps in managing your inventory efficiently and reduce costs, making products available quickly so that you can focus on increasing revenues.

2. Eliminate Unreliable Vendors

If any vendor consistently delivers your orders late, it may be time to say goodbye to them.

They may cost you more than finding another supplier.

Evaluating your vendors will have a positive effect on your financial performance even if you consider the transition cost.

Just make sure that you have enough stock to last you in the transition period, and that your new vendor can start delivering goods immediately.

ALSO READ: Ways to Improve the Procurement Process

3. Select Vendors That Are Close

The marketplace is global today, giving you access to suppliers the world over; however, you may have to wait for a long time to get deliveries, increasing your lead time, and complicating the process of returns.

It would make sense to prioritize vendors who are near your manufacturing unit or warehouses.

If it’s a matter of price and/or quality, order from your overseas in larger quantities but less frequently.

Sourcing locally can help you reduce lead time and save in shipping cost; so you can order when you’re running out and your overseas shipment still has time to arrive.

4. Inform Vendors of your Demand Forecasts

Businesses in industries with fluctuating demands can experience varying demands every month.

So, when you’re expecting higher demand, it’s a good idea to inform your suppliers early on so that they are prepared to fulfil a larger order quickly.

ALSO READ: Tips For Efficient Stocktaking

5. Increase your Capabilities

If you outsource some of your processes, think about handling that in-house so that you can stop sending your products to third parties for finishing.

While it may cost you initially, you will save in the long run, and cut down lead time significantly and for good, making it a feasible option.

This will also form your infrastructure for future growth. You will be able to scale easily as your business grows, and you earn more profit.

6. Automate Order Processing Workflows

When you’ve got the raw materials and are about to start manufacturing, ensure that internal processes are efficient so that production lead time is decreased.

Think about how long you need to enter customer orders in your system, how often orders get lost, the time taken to produce goods and move them through QA, and how many times poor communication causes delays in production.

In case your performance in one or more of these areas isn’t good, you’re likely to have lengthy lead times.

Order processing workflow automation can help you roll out finished goods faster.

Automation includes robotics, barcodes, RFIDs, and strategies that reduce human effort in operations.

ALSO READ: Challenges in ERP Implementation

7. Complete Several Processes Simultaneously

Certain processes are dependent on others being completed to start, and there is nothing you can do about that.

However, many are independent of one another; identify such processes and run them simultaneously to boost productivity and cut down lead times more.

8. Enhance Inter-Departmental Communications

Order processing involves multiple departments, and hence collaboration is essential.

To collaborate, it’s a given that proper communication is necessary.

Certain steps may necessitate inputs from several employees from different departments, and it is critical that there is no confusion.

Also, it is better to avoid using paper for these processes and switch to a software system like Tranquil which automatically routes documents to the relevant employee or department in order of priority, and alerts those individuals about taking action on specific documents.

ALSO READ: What is Batch Tracking?

9. Communication with Customers

While this does not actually help you decrease lead time as such, you can keep customers informed regarding their order status; this will help them stay loyal and prepare them to wait, as they are aware of what is happening with their order.

You can implement Tranquil ERP which will help you do this automatically.

This way you can set customer expectations and boost satisfaction.

10. Change Shipping Methods

Even little changes made to your shipping methodology can give you better control over delivery schedules and help decrease expenses.

Explore the shipping methods available to your for the type of products you have and work out which methods will be quicker and more economical.

ALSO READ:  Critical Factors for a Successful ERP Implementation

11. Vertical Integration

This strategy is used by businesses to make up for the time that is lost in shipping goods.

The company produces its raw materials and components, rather than purchase them; this can significantly reduce lead times.

Of course, it will necessitate heavy financial investment at the outset, but in the long run, it will help save money on overheads, reduce time, and help to scale the business.

ALSO READ: Important ERP Implementation KPIs to Know

12. Layout Planning

Obstacles to flow include batch-oriented machines, lengthy configuration times, long distances, poor maintenance, and so on.

This can be improved with layout planning.

This has several steps, from how you organize data to how you can avoid supply chain conflicts.

Lean layouts often focus on minor and unimportant things like waste management and decreasing changeover time, but layout planning concerns itself with the overall picture, like the way your facility is organized, where the waste is, and how the whole organization can be redesigned to align with just-in-time and flow concepts.

Having a visual representation of this layout will benefit all stakeholders.

ALSO READ: ERP Software to Enhance your Purchase Management

13. Quantifying Lead Time Reduction

Now this can be a little difficult especially when you are doing it on an operational level, as the lead time can differ according to the department, and operation in your company.

It is important to identify which department or operation has the longest lead time.

This can be established with an effective quality assurance audit or a thorough root cause analysis; you can also do it visually.

A graphical mapping tool like 3D visualization, spaghetti diagrams, or value stream analysis will help the participants to recognize wastage, and ideas to improve things.

They will be able to understand how much time it takes from the time a customer order is received till it is delivered to their doorstep.

The results of this study can be used as a basis to take remedial measures and to report to the management regarding the measures taken to improve lead time over time.

ALSO READ: Guide on How Do ERP Systems Work

Tranquil is a prominent cloud-based ERP software system that helps you to manage your projects and business work in a hassle-free way. Moreover, with this software, you can access your business data anywhere, any time. If you want to manage an ERP software system, you can get in touch with Tranquil BS.

 

Materials are needed for every business, whether they are manufacturers, retailers, construction companies, or consultants.

Basic office supplies, raw materials, equipment, machinery, and services – are the materials needed by most businesses.

The question is how to manage these purchases properly; by allowing department heads to directly place orders with vendors, it could lead to increased or fraudulent expenditures.

ALSO READ: How to Choose an ERP Software to Enhance your Purchase Management?

Let’s understand this with an example:

The IT department in a company needs a few printers as the workload has increased as have employees.

Do you tell the IT department manager to go out and purchase the printers they want?

If you do, there is always the possibility of misuse of company funds: bills can be inflated either by showing more printers or higher price when it is not so in reality. Or they may buy more than what your company budget can allow.

This can harm your financial planning and have a negative impact on your cash flow.

Budget overshooting can happen inadvertently too; employees may not be aware of budget restrictions and accidentally overshoot it.

Therefore, most companies have standardized processes for purchasing, with proper approval workflows.

In the event your company has increased scrutiny over expenditure, is on a tight budget, or is facing problems with cash flow, it would be wise to put in place a standard purchase process so that unnecessary expenditure can be controlled.

The entire process begins with a purchase requisition form, which gives rise to a purchase order.

ALSO READ: Challenges Facing Purchasing and Supply Management

What is a Purchase Order?

Once the purchase department receives a purchase requisition and approves it, they generate a purchase order with all the details like quantity, specifications, and so on, and send it to the vendor.

A PO is a binding contract that mentions exactly what a company wants to purchase.

What is a Purchase Requisition?

Purchase requisitions are typically used when purchases are required to be made by different departments on the organization’s behalf.

It is a form used by department managers to inform purchase officers about a requirement for materials for which purchase is necessary.

This triggers the purchase process and the finance team in turn uses the document to coordinate with the accounts department and make necessary entries in the company’s books.

It’s an internal document used by employees to purchase goods or services for their company.

They may be inventory, manufacturing requirements, or office supplies and equipment necessary for business operations.

The first step in the purchase process is submitting this form to the purchase department; it also creates a proper audit trail for the purchase.

On approval of the purchase requisition, the purchase department generates the PO and sends it to the relevant vendor.

ALSO READ: Difference Between Procurement And Purchasing

What Does a Purchase Requisition Form Contain?

A purchase requisition form has the following information:

• Name, department, and designation of the employee making the request
• Date
• Products requested (or services)
• Details of products and their quantities
• Estimated price
• Reason why it’s being purchases
• Vendor name

Steps Involved In The Purchase Requisition Process

While individual companies may have their own steps for purchase requisition, the basic workflow goes something like this:

1. Submitting the Requisition Form

When a staff member identifies that there is a need for certain goods, he requests purchase of those items.

This is done when they fill out a form which contains details of what they want to buy.

This can be done manually or using software.

ALSO READ: Ways to Improve the Procurement Process

2. Line Manager Approval

An internal approval process takes place where the line manager of the requesting employee’s department checks if the need is genuine and legitimate.

They will also verify that the purchase value does not overshoot the allotted funds for the department.

3. Inventory Check

The next step in the process is sending the purchase requisition form to the inventory department, where they check if the requested product is available in the company’s inventory.

if it is in stock, the department is so informed, and the products are sent over.

If there are no products in stock, the form is forwarded to the purchase department.

4. Purchase Department Screening and Approval

Once the purchase department receives the request, the purchase manager or designated employee processes the form.

They will identify the business need, verify the legitimacy of the request, and check if the form is properly signed and authorized.

If any details are missing, the officer may either return the form to the requesting employee for filling them in or complete them himself.

If he finds that the request is not valid or genuine, or overshoots the allotted limit, he may reject the requisition form and return it to the department or requesting employee with reasons for the rejection.

ALSO READ: Essential Procurement KPIs You Cannot Ignore

5. Generating Purchase Order

Once the requisition form has been approved completely, the purchase department generates a purchase order with all details and sends it to the supplier.

On accepting the PO the supplier is legally bound to fulfil the terms of the document.

6. Order Delivery and Assessment

The products are shipped by the supplier, and on arrival, the purchase department or warehouse staff verifies that the quality and quantity delivered are as per the purchase order.

A three-way verification process is carried out to check the invoice, packing slip and purchase order to confirm order accuracy.

This way, the company ensures that they are only paying for the items that were ordered and received, nothing more.

Returns if any are handled by the warehouse staff or the purchase department’s receiving team.

7. Paying the Invoice

Once the delivery is verified as correct, the PO is closed and the invoice is sent for approval to the finance team.

They enter it in the books of account as accounts payable, and make payment on the due date.

ALSO READ:  Challenges in Procurement and Supply Chain 

The Purpose of Purchase Requisition

We have already seen that if individual department managers are allowed to directly place orders for products they require, there is a higher chance of fraud and overspending.

It is to eliminate this that organizations create a procurement department with standardized procedures to procure goods and services on behalf of various departments.

When a specific process or workflow is followed by the purchase team, it not only minimizes possibility of fraud, but also creates an audit trail so that responsibility is fixed on every individual involved in a particular purchase.

An important internal document used to make purchases is a purchase requisition form.

This form enables teams to convey important information regarding purchase requirements to the purchase team who can then place orders correctly for the various departments.

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

Let’s say the marketing team needs to purchase some office supplies; they have to fill out a purchase requisition form detailing their needs and send it to the purchase department.

Merely telling the purchase department what they need does not help in reducing fraud as there is no paper trail and it leaves space for deniability.

Purchase requisition form allow companies to validate purchases, and based on these forms, the purchase department triggers the procurement purchases till the marketing department gets the supplies they need.

The purchase department has to act on the requisition forms they receive.

They can approve, deny or change the requests made by different departments.

Rejections must be accompanied by reasons so that the department can make necessary changes.

ALSO READ: Debit Note vs Credit Note

Importance of Purchase Requisitions in the Purchase Process

1. They Initiate the Process

When departments submit a requisition form to the purchase department, it initiates the entire process.

The purchase department generates a PO based on this form.

In case of any problems, this form becomes important evidence to check facts and affords better protection of organizational assets.

It is followed and acted upon, and thus creates a paper trail.

2. Effective Control Tool

Without checks and procedures, staff may commit fraud – order materials not required and pocket them, for instance.

However, with a formal written request, the possibilities of fraud are minimized as the request has to go through several people for validating it.

All the scrutiny before approval ensures that it is a valid purchase.

You could say that it’s a formal method of issuing a purchase notice, with evidence that a department requested a purchase.

The responsibility for that expenditure will be transferred to the purchase department from the requesting department.

ALSO READ: Vendor Managed Inventory and What are its Benefits

3. Helps Save Costs

By centralizing purchases, a business can save time and money; you can see at a glance what you’re buying, how much you’re buying, and at what cost.

As purchase managers receive several requisitions, they can bundle orders and use this as buying power leverage.

This can help you negotiate better with suppliers and get better prices and payment terms.

4. Important Evidence for Audits

As audits require seeing approvals from proper authorities for purchase decisions, purchase requisition forms are ideal.

They contain details of the requesting employee, approvers, and materials that were requested.

5. Helps Avoid Duplicate Orders

With a whole department just to handle purchases, companies can use purchase requisition forms to track all requests and ensure that no duplicate requests are there.

This way, accidental multiple orders for the same item can be identified and eliminated.

ALSO READ: Cost Reduction Strategies in Procurement and Supply Chain

6. Boosts Accountability and Business Security

Purchase requisition forms are proof that a specific department needed certain products and that they had ordered them.

After matching the delivered goods with the requisition, a paper trail is created from the time of requisition till they are ordered.

This assigns accountability to all individuals involved in the process from start to finish and increases security for the organization.

In the event any fraud or mistake is detected at a later stage, none of the employees involved can deny their role as their details are recorded, and they can be asked for an explanation.

ALSO READ: What is Cross Docking?

Final Thoughts

Though it is a simple document, a purchase requisition form is a critical tool of spend control, especially for medium and large organizations where there are numerous departments and thousands of items that are used and required to be purchased frequently.

It is essential to authorize purchases for an organization and can be used to prevent fraud.

However, if you have to fill out a form manually every time someone in the company needs to purchase something, it can still lead to errors, and take up precious time of your employees.

The wise thing to do would be to implement robust business software like Tranquil to automate repetitive and cumbersome tasks and streamline your workflows.

Leverage the feature-rich procurement module to keep the cost of procurement low, while always having adequate stocks to operate your business.

If you’re not sure how this works, do schedule a free demo at your convenience, and we will walk you through our software. Our team will be happy to answer any queries you have.

Every business needs finances to operate – buying raw materials or products, paying wages, rent, insurance, utilities, repairs, and so on.

The cash required for these activities is called working capital.

A small business that is on a growth trajectory will especially be in need of funds quickly for their expansion.

Wholesale business is usually conducted on a credit basis, where the purchaser is given a specific period – usually 30 days – to pay the amount.

A growing business may find it difficult, however, to wait for so long to get paid.

This is where reverse factoring comes in.

ALSO READ: Benefits of ERP in Accounting and Financial Management

What is Reverse Factoring?

Reverse factoring is also referred to as supplier finance or supply chain finance, and is a fintech solution that helps in mitigating the adverse impacts of prolonged payment terms.

It can help both vendors and buyers in optimizing their working capital.

This methodology connects financial institutions, vendors, and buyers, and helps to enhance cash flow, decreases risks in the supply chain, and offers predictable ROI for those supplying the funds.

We could say that it’s a type of supplier financing solution.

ALSO READ: Benefits of Bank Reconciliation in Accounting 

Businesses can utilize reverse factoring and make payments earlier than the due date on specific invoices.

Vendors who participate in reverse factoring usually request the financial institution in question to make early payments against specific invoices, and the buyer makes payments on the maturity or due date to the bank or financier.

By facilitating vendor access to reverse factoring, buyers can lower the risk of disrupting their supply chain, and improve relationships with vendors, while bettering their working capital posture.

Reverse factoring programs may be offered either by one single bank or by platforms which facilitate several different financial institutions to offer funds.

A crucial thing to consider when implementing a reverse factoring program is reverse factoring accounting, or how you will treat it in accounting.

Businesses need to ensure that it is categorized not as a bank debt but a solution that is not included in the balance sheet.

How Does Reverse Factoring Work?

The reverse factoring process involves several steps which we mention below:

• Company buys goods or services from a vendor
• Vendor uploads the invoice on the reverse factoring platform mentioning the due date a few days or months into the future
• The invoice is approved by the buying company
• The vendor requests early payment against the invoice
• A financier pays the vendor the amount, deducting a small amount as fee
• On the due date, the company makes payment to the financier

ALSO READ: Ways To Do Budget Variance Analysis

What is The Importance of Reverse Factoring?

Let’s face it, it’s a consumer’s world; especially in the corporate sector.

The buyer decides on payment conditions.

On the other hand, vendors are not willing to wait for ages to get money, since they have huge capital expenditures and working capital investments.

Moreover, they understand the tremendous opportunity for revenue and growth they have when they receive purchase orders from large corporations.

By entering into reverse factoring procedures, they can get their payments immediately instead of waiting for the maturity date of the invoice.

If we check the history, reverse factoring began in the automotive industry, as it enabled companies to operate more effectively with their suppliers, which were relatively small companies.

However, the reverse factoring market size is still small when compared to say, the factoring market.

ALSO READ: What is a Ledger in Accounting? Types and Formats of Ledger

Requirements for Reverse Factoring

Businesses seeking reverse factoring may be required to submit the following documents, though the requirements could differ for individual companies:

• Comprehensive business plans
• Credit reports
• Financial statements after auditing
• Finance forecasts
• Directors’ names and details
• A detailed list of assets and liabilities

Now that we have seen what the term means and why it’s important, let us see what the benefits of reverse factoring are. Both vendors and buyers benefit from this technique.

ALSO READ: ERP vs CRM: Key Differences and Benefits 

Benefits for Vendors

• Funding at Reduced Cost – the buyer’s credit rating is considered, and these are usually big, established companies with better ratings, and hence the financial institutions charge lower interest for funding
• Enhance Working Capital – vendors can fast-track their cash flow and improve their working capital posture by decreasing their DSO or days sales outstanding.
• Spur Innovation – when they get quick payment against their invoices, vendors may be motivated to invest in research and development activities and engage in business expansion.
• Better Forecasting of Cash – vendors can benefit from being sure about when they will receive future payments. They will be able to effectively forecast their cash flows and make sure that they base their decisions on reliable data.

ALSO READ: What is Asset Depreciation?

Benefits for Buyers

• Better Working Capital – with reverse factoring, buyers can also improve their working capital as they can extend their DPO or days payables outstanding.
• Mitigate Supply Chain Disruption Risk – when vendors get cash early, they can reinvest it in production or bulk purchases quickly, and fulfil the demands of buyers
• Forge Better Bonds with Vendors – suppliers will be happy to get money early; so, by introducing a program that makes it possible to receive payments early will help in strengthening their relationships with those vendors.
• Stronger Negotiating Position – buyers who offer reverse factoring to their vendors may get a stronger case to negotiate better terms of purchase with them.

ALSO READ: What is a POS System?

Who Uses Reverse Factoring?

This financing method is usually offered to those vendors with whom a business has been trading for a long time, and are therefore trustworthy.

You are not likely to offer this facility to a vendor with whom you are working for the first time.

It also takes some time to include a vendor into the reverse factoring system of any company.

This is a method that is normally employed by large businesses that is looking to make their cash flow situation better.

They need some time to convince a bank or financial company to get involved in this arrangement; the financiers are more likely to agree to extend this facility to large companies, as they have good credit ratings.

Small companies are generally not offered this facility.

Experts feel that reverse factoring facilities should not be offered to more than 50 vendors for a variety of factors; a huge reason being the intense administrative effort that will be needed for onboarding vendors into the system.

That, however, was the conventional viewpoint.

ALSO READ: How ERP Can Improve Business Efficiency?

Today, with robust software like Tranquil, companies can easily offer this facility to all their vendors.

This could be hundreds, thousands, or even tens of thousands of them when we talk about large corporations.

As small businesses who supply products to large businesses often find it nearly impossible to get funding at economical rates, offering all vendors reverse factoring can exponentially increase the benefits offered by this method.

For any reverse factoring system to succeed, it is essential that vendors are onboarded quickly and smoothly.

If the onboarding process is hassle-free, more and more entities will adopt it.

This process can be utilized by businesses in any industry; they just need to ensure that the purchasing company has a strong credit rating and that there is a robust relationship between the buyer and vendor.

It is usually seen in these industries:

• Clothing
• Automotive
• Manufacturing
• Aerospace
• Electronics

Reverse Factoring Vs Dynamic Discounting

Dynamic discounting is somewhat similar to reverse factoring; however, it’s not the same, and the two should not be confused with each other.

Dynamic discounting is another financing solution that allows buyers to make an early payment offer to the supplier.

However, here, the funding comes from the buyer and not a financial institution or bank.

In Dynamic discounting, the buyer negotiates for a discount for making early payments against their invoices.

Here the buyer uses their own cash to support supplier, get risk-free returns, and mitigate supply chain disruption risks.

ALSO READ: Complete Guide on Make to Order vs Make to Stock

What is the Difference Between Traditional Factoring and Reverse Factoring?

Factoring and reverse factoring are two different methods of financing.

Factoring is a method of receivables financing, where a business discounts its invoices and sells them to a factor.

The customers of that company then make payment against those invoices to the factor or factoring company.

In reverse factoring, it is the buyer who initiates the program, and not the vendor.

Therefore, the financial institution charges an interest rate after taking into consideration the credit rating of the buyer rather than the vendor.

Usually, this leads to funding at a lesser cost than what the vendor could have hoped to get.

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

There are a few differences in the two methods.

Let’s check them out:

• Factoring is requested by the supplier; they offer discounts on early payment of invoice. Reverse factoring is initiated by the buyer.
• Factoring is considered as debtor finance while reverse factoring does not qualify to be so considered.
• In factoring, suppliers sell their accounts receivables to an external factor at a discount, so that they get paid quickly, and the factor also gets to make a profit, as they collect the entire amount from the purchaser.

Vendors are willing to use factoring as it enables them to infuse cash into their business immediately – even if they get a slightly lesser amount.

The factor faces a slight risk as they have to collect the amount from the buyer of goods on the due date.

Usually, factors agree to deals only if they are confident that the buyer will pay for sure.

In essence, both methods help businesses in the supply chain get paid earlier and improve their working capital situation.

ALSO READ: On-Premise or Cloud Database Hosting: What’s Right for You?

Final Thoughts

While reverse funding is an ideal strategy for supply chains in numerous instances and offers benefits for all stakeholders like financiers, buyers, and vendors, it is still used quite rarely.

Most businesses find it easy to quickly sell off their invoices to third-party factors at discounts.

Reverse funding is a great method for companies that have a requirement for funds to be received in ten days; it is expected that the popularity of reverse factoring is set to increase in the near future, thanks to its numerous benefits.

Banks will be able to generate additional revenue streams if they make a stronger push for this financing method.

Tranquil ERP has a feature-packed finance module that can help you with factoring accounting, reverse factoring, or any other accounting process you may require.

It also provides other modules that help you run your business more efficiently and increase productivity.

If you have not yet implemented a cloud-based, scalable, flexible, secure, and affordable ERP, it’s time to switch to Tranquil Cloud ERP. But don’t just take our word for it – allow us to show you how we can help your business. Do schedule a free demo at a time of your convenience, and we will be happy to walk you through it and show you how it works. Our representatives will be available to answer all your queries regarding our software.

 

No, we’re not talking about the age of your customers and suppliers in years.

Supplier aging is also known as accounts payable aging, and customer aging is also called accounts receivable aging.

Let’s clear the air and understand what both these terms mean and what their importance is in accounting.

ALSO READ: Tips to Improve Inventory Turnover 

What Is Meant by Customer Aging?

Accounts receivable or customer aging refers to the period of time an invoice hasn’t been paid by a customer.

This often reflects the state of the company’s finances and dependability of their customers.

The customer aging report is prepared periodically to assess how much money the business is owed by its customers.

You can see how quickly or slowly you are able to collect money from your customers.

If it is too slow, it could signal a higher credit risk in sales, or that the business itself is slumping.

ALSO READ: Importance of Cash Book in Accounting

How Does it Work?

Customer aging is a management technique that identifies high-risk customers, enabling management to take a call about continuing to sell to those customers who are perpetually late with payments.

The customer aging report contains columns, normally broken into month-long date ranges, showing the total amount due at present, and the dues for every month.

Some businesses may follow a strict 30-day period as well.

Whenever a customer makes a payment against an outstanding invoice, whether current or past due, you must reduce the accounts receivable against that customer by that much amount.

So, if a customer owes you SAR 2500 and it is past due for about 40 days, and he pays you the full amount, you must ensure that that column is now brought to 0.

ALSO READ: What is a Ledger in Accounting? 

Doubtful Accounts

Customer aging reports are valuable in deciding what to do about doubtful accounts.

When you are preparing the financial statements, you need to estimate how much bad debt should be mentioned.

The customer aging report helps in determining the write-off amount.

The most valuable aspect is getting the aggregate of accounts receivables, depending on how long the invoice has been unpaid in days or months.

If invoices remain unpaid for over six months, the possibility of collecting on them become very slim – unless you take legal recourse.

Each date range is assigned fixed default percentage, with invoice unpaid for long time periods being assigned higher percentage due to the higher risk of default, and reduced chances of collection.

The total of products from every data range offers an idea of how much uncollectible receivables is there in total.

ALSO READ: How to Understand and Manage VAT for Your Business?

Benefits of Customer Aging Report

The customer aging report helps a business in numerous ways.

Accounts receivables is basically credit that is extended to customers.

The aging report shows the customers who are consistently paying late, and this can help management take a decision whether to extend further credit or do business only on a cash basis with these customers.

They are helpful in writing off bad debts; we saw earlier how the total amount of accounts receivables helps accountants determine who much bad debt is to be shown in the company’s book of accounts and on the financial statements.

By tracking unpaid invoices, the business can identify the number of accounts they will be unable to collect from, and also evaluate cash flow problems and potential credit risks.

ALSO READ: Debit Note vs Credit Note

The customer aging report also forms the base for generating letters for collection to customers with long outstanding balances.

Businesses usually send copies of the report to customers together with a collection letter or month-end statement that mentions details of outstanding invoices.

This means that accounts receivables aging report is used both internally and externally.

Calculating Customer Aging

The unpaid accounts are listed in chronological order of their payment status.

There are different slots like current, less than 30 days, 60 days, etc.

Depending on how many accounts are aged over 180 days, a business can get an approximate figure of outstanding accounts receivables to be written off in the future.

ALSO READ: Ways To Do Budget Variance Analysis

Importance of Customer Aging

While customer aging reports offer several benefits, there are two main reasons why a business keeps track of them:

• To have a clear record of overdue accounts which will help the business to follow up on old debts; these can then be written off, followed up legally, or sold to collection agencies.
• To have a proper understanding of how many accounts the business can expect to not collect on. The company uses the allowance method to figure out these estimates, which are included in the financial statements as expected losses.

ALSO READ: What is Asset Depreciation?

Supplier Aging

Businesses almost always purchase goods for sale or raw materials for production on credit.

Companies that deal in a large number of products may find it overwhelming to keep track of how much they owe to different suppliers.

A supplier aging or accounts payable aging report can be of great help in such cases.

What is a Supplier Aging Report?

To understand this, it is essential to first get a clear and complete understanding on what accounts payable is.

To put it simply, accounts payable is the money you owe to your suppliers; the debts you owe them for the purchase of services, inventory, raw materials, and anything else, for operating your business.

Your accounts payable increases every time you make a credit purchase.

The seller or supplier generates an invoice in your name and you pay them at a later date.

Ergo, a supplier aging report lists the amounts you owe to other providers and have not paid.

It helps you see at a glance how much you have to pay, and to organize these amounts.

ALSO READ: Guide on Inventory Demand Forecasting 

Supplier aging reports include the following:

• Name and contact details of the supplier
• The amount owed to individual suppliers
• The age of the unpaid invoice or the length of time you owe the debt
• Payments that are past due

A detailed supplier aging report offers an uncomplicated method of tracking and managing your accounts payable, allowing you to make timely payments, and eliminating late fees of other penalties, legal actions by your vendors, and the loss of reputation in the market.

Benefits of Supplier Aging Report

The accounts payable report helps you in:

• Managing your cash flow
• Deciding on the priority of the order in which to pay your debts
• Planning business budget and future expenditure
• Detecting issues in accounts
• Ensuring that you don’t miss payments and helps you make timely payments
• Negotiating the terms of payment of invoices

ALSO READ: Tips to Increase Gross Margin Return on Investment (GMROI)

Components Of the Supplier Aging Report

The supplier aging report contains columns that help in categorizing your suppliers, the invoice age, names of you suppliers, the amounts you owe them, and so on.

There is a separate row for each vendor which mentions the total amount you owe them, and, if applicable, the amount that is past due.

The supplier aging schedule contains columns that classify your debt depending on the invoice age.

Every column refers to a specific period of time after receipt of the invoice – usually that time period is 30 days.

ALSO READ: What is Job Costing?

So you may have columns like:

• Less than 30 days old or current (not past due yet)
• Less than 30 days past due (after the first 30 days from the invoice date)
• More than 31 and less than 60 days past due
• More than 61 and less than 90 days past due
• More than 91 and less than 180 days past due
• Over 180 days past due

So as long as you pay within the first 30 days of the issue of the invoice, it is not past due; it is from the 31st day after the invoice date that your past due days are counted.

If the invoice is not paid within the first 30 days, it becomes past due. And depending on how long you have not paid the invoice, it is put into one of the columns.

For example, if you have received an invoice on March 1st, then you have 30 days to pay, so you must pay on 31st. On the 1st of April, it becomes one day past due.

The supplier aging report maintains a running balance on the amount owed to various suppliers.

ALSO READ: Ways to Improve the Procurement Process

Every time you purchase goods and services on credit, your accounts payables increase; when you continue to buy from the same vendor on credit, you could end up owing one supplier for numerous transactions.

The report helps you see which payments are already past due, and you can make a decision regarding which debts to pay off first.

Every time you pay off an invoice, either current or past due, that amount is to be deducted from the respective column in your supplier aging report.

Suppose you pay SAR 5000 to a vendor to whom you owe SAR 7000, and the invoice amount was in the ‘more than 31 and less than 60 days’ past due column, you should delete that amount and ensure that the column against that vendor’s name reflects the new balance of SAR 2000.

When you use the accounting software from Tranquil, it will automatically update the balance in the accounts payable aging report by deducting the amounts paid.

ALSO READ: Challenges in Procurement and Supply Chain

Things to remember about a Supplier Aging Report

You can ensure that your report is accurate and valuable by considering these:

• Include vendor terms to avoid late payments; most vendors allow 30 days for payments after which invoices become past due, but the terms can differ
• Update your supplier aging report regularly, and remove amounts that you pay, or else you will not get a true picture of the amounts you owe your vendors.

Customer Aging Vs Supplier Aging

We have seen what customer aging is and how it impacts the business, and what supplier aging is, and the effect it can have as well.

Both reports help businesses to handle their cash flow better and plan for future expenses and budgets more effectively.

Let us now take an in-depth look at the difference between an accounts payable aging report and an accounts receivable aging report.

We will refer to customer aging as AR and supplier aging as AP, for short.

One thing is very clear. They are both the opposites of each other.

• AR aging report shows you how much money your customers owe you, while AP report shows you how much you owe your vendors.
• AR aging report helps you decide whether to extend further credit to a late-paying customer; AP report helps you make timely payments and avoid fines
• AR aging report helps you determine how much to write off as bad debts, while the AP report helps you to negotiate for better terms of payment

ALSO READ: Vital Procurement KPIs You Cannot Ignore

You can create supplier and customer aging reports manually or be smart and leverage automation. Tranquil ERP is an efficient solution with a robust finance and accounting module that helps you keep track of your accounts payables and receivables, and eventually, save money and time.

For more details of how it can benefit your business, schedule a free demo now!

 

Inventory is one of the most critical assets for any business that manufactures or sells products.

But managing inventory effectively can be extremely complex.

Today we look at SKUs and their role in inventory management.

Do we have too many SKUs?

Many retailers ask this question to themselves, as they struggle to manage their inventory efficiently and try to keep costs down.

While you do need a good number of SKUs to make sure there is availability and variety of products, it also signifies that your business and logistics provider have to keep track of that many SKUs.

If you ever get the feeling that you have way too many SKUs, and it’s becoming overpowering, then it’s time for SKU rationalization to optimize your inventory.

Let’s first get a clear understanding of what SKUs are before we start discussing the rationalization process, strategies, and benefits.

ALSO READ:  Inventory Reduction Strategies

What are SKUs?

A Stock Keeping Unit or SKU is a system of inventory management where you allocate a distinct alphanumeric bar code to a product’s variants.

Let’s take the example of a clothes retailer.

A polo neck T-shirt is likely to be available in a range of sizes and colors; this means separate SKUs for every variant combination.

Like, T-shirt size M color blue, size M color red, size XL color blue – you get the drift.

One product can produce even 50 separate SKUs.

However, maybe a certain color is not selling as well as the others, or some sizes are slow selling; the seller has to make a decision here.

ALSO READ: Guide on Stock Adjustment and Stock Transfer

SKUs are retailer-specific, and help in inventory management; they are unlike UPC or EAN barcodes which are universal.

These SKU codes help customers to differentiate between similar products, and in that sense, they are highly valuable to businesses.

However, too many of them means there are too many vendors, people, data, storage space, analysis, and so on.

Simplifying operations in your business is a major requirement for the efficient functioning of your business and is also critical in supply chain management.

SKU rationalization is one method you can use to achieve this objective.

SKU Rationalization

In the simplest terms, SKU rationalization is the process of deciding which products to discontinue and which to maintain, to reduce the number of items and simplify business operations.

You can eliminate nonessential carrying costs and reduce other production expenses too.

This process can significantly alter the manner in which your business operates.

Therefore, you should approach this thoughtfully, and do it in a phased manner.

If you follow the proper guidelines, you should be able to reduce your SKUs smoothly and seamlessly.

When managing inventory for a product, it’s up to the merchant to decide how many SKUs they choose to have available for that item, and the quantity of each.

For example, an apparel brand selling a particular style of a t-shirt might choose to stock seven of the ten available colors offered by the supplier.

ALSO READ: What is Inventory Reorder Point(ROP)?

To use the proper definition of SKU rationalization, it is the process by which traders can measure how profitable the products they stock in their inventory are.

With the use of performance indicators like supplier fees, storage costs, carrying costs, etc. combined with sales data, retailers can take decisions regarding items that need to be discontinued or continued but with certain adjustments.

Businesses can determine if any of the SKUs are hampering or improving their business, and take requisite action to streamline their inventory and reduce costs of operations.

Any business can enjoy the benefits of regular SKU rationalization; however, it is especially critical in the case of those categories of products that have specific products with seasonal demand and are subject to high turnovers.

Examples of such products include clothes; like jackets and warm clothing will only be in demand in the colder months.

SKU Proliferation

SKU proliferation is the opposite of SKU rationalization; here a seller adds more SKUs to their stock to be able to fulfil consumer demand.

This strategy is gaining popularity due to the sharp growth of E-commerce because sellers want to tap into more markets and attract as many new shoppers as they can.

Logically, more SKUs mean more variety and choice for shoppers; it also indicates having a competitive edge in the market.

ALSO READ: What is Order Up to Level in Inventory Management? 

Why is SKU Rationalization Important?

Of course, this means that you will incur more expenses in the form of labor, carrying costs and so on, and also require additional storage space, and you will also tie up more of your capital in inventory.

Your data analysis will be more complex and intensive.

All of these can be overwhelming and challenging not only for you but also for your third-party logistics service provider.

To put it succinctly, increasing your SKU counts can be expensive and draining for your business.

Benefits of SKU Rationalization

1. Reducing Storage and Supplier Costs

Storage charges, labor cost, insurance, etc. are all part of the carrying cost of inventory, and it makes up for over 30% of inventory cost on average.

After all, once you purchase products, you have to store them well and care for them till they are not just sold but packed and shipped out.

By analyzing historical sales data, you can get a good idea of how much quantity of an SKU to order, and the time to reorder it.

With an automated inventory tracking system, you can get all the data and analytics you need for calculating the turnover rate of your inventory; this metric tells you the number of times a particular inventory item is sold and replaced within a specific time period.

Tranquil simplifies monitoring costs like storage, fulfilment, and so on across your network by monitoring inventory activity – like what products are entering and leaving the inventory – in real-time, with a central and intuitive dashboard.

ALSO READ:  Cost Reduction Strategies in Procurement 

2. Better Inventory Accuracy

Tracking the stock in hand is not the only facet of inventory management; decisions have to be made regarding individual SKUs about reorder levels and times, and more.

Tranquil inventory management software tracks performance of SKUs over specific periods and delivers important KPIs like demand forecasting, SKU velocity, inventory turnover rate, etc.

With Tranquil, you can easily track SKUs, enabling you to see, administer, and alter SKUs whenever you want.

It also facilitates the bundling of products so that you can sell of slow-moving SKUs with hot-selling ones.

3. Enhances Profitability

Inventory is an asset on the balance sheet of any business, and costs incurred in carrying unsold inventory is considered working capital.

This is, assuming that the goods will be sold for a profit by the end of the accounting period or financial year.

However, we know that stocks can experience loss in value, and sales can suddenly dip.

When this happens, unsold items become dead stock and are usually written off.

While this is beneficial in the short term, too much working capital invested in obsolete inventory can negatively impact you in the long term.

ALSO READ: What Is Gross Margin Return on Investment (GMROI)?

SKU Rationalization Process

Here are the steps to follow:

1. Think About your Target Market

This is the golden rule in business.

You need to consider your target audience, your buyer persona – and the USPs, or the selling point or value proposition you’re offering this audience.

Your products need to be aligned with this value proposition so that you can create offerings your customers are most likely to be interested in.

In other words, your products should be able to resolve some of the pain points of the target audience or be something they really love.

Check your SKUs against these two factors.

Those that are not selling well, may not be resolving their pain points or be a popular item in that audience.

Make a list of such products from which you can finalize which SKUs you actually want to remove from your stocks.

ALSO READ: Detailed Guide on Budget Variance Analysis

2. Analyze your SKUs in Detail

With regular tracking of sales data, you will have a clear picture regarding the high-performing SKUs, and which ones give you excellent ROI, after factoring in cost of inventory and suppliers.

In spite of this, you must also consider the scenarios like volatile customer demand, poor turnover of inventory, high rates of return, high need for storage, intense labor requirements, and prolonged lead times.

By studying these factors, you will be able to understand how all an SKU can hamper your business.

If a particular SKU exhibits two or more of the features just mentioned, you need to think of discontinuing that SKU; if it’s just one, you may want to think of how you can resolve this problem and manage your inventory more efficiently.

3. Consider other Impacting Variables

After performing your SKU rationalization analysis, you must think of variables capable of impacting the profitability of an SKU.

If you compare your market activities and sales, you will be able to see if any specific offers caused a sharp increase in the sale of a specific SKU.

But in case you’ve launched a product that competes with an existing item, you may experience a dip in the sales of the older product.

This product cannibalization is why you need to exercise caution during SKU proliferation.

Check what your rivals are doing; have they launched new products that have caused dips in your sales?

ALSO READ: Why Use a Barcode For Tracking Inventory And Assets?

4. Organize your Product Catalog

You can create separate categories of SKUs and sort each SKU into a specific category for easy review.

Like, the categories could be Continue, Remove, Adjust/Review (if you’re unsure).

This way you will have more clarity, and minimize errors.

ALSO READ: Guide to Avoiding Understocking and Overstocking

5. Review Results

Once you complete your new catalog after SKU rationalization, you must measure the results of the process, and check to ascertain if you have reduced dead stock and operational cost.

In case you have achieved this without impacting your bottom line, this means you have succeeded in inventory optimization.

Ideally, this audit should be performed once in six months to keep your inventory lean, while giving you ample time to gather data for actionable insights.

So now you can understand how rationalizing your SKUs can optimize your inventory and help you manage it better. Automation can take the guesswork out of the equation, streamline your inventory management, and help you be more efficient and productive. Schedule a demo to see how it works, at a convenient time for you.