That Time of Year: The Annual Physical Parts Inventory

While the holiday season is filled with events we all look forward to, one tradition that doesn’t typically generate much enthusiasm is the annual physical parts inventory. It is usually a daunting, dreaded task, disruptive to your business and employees’ personal lives, and fraught with potential drama.

Of course, the annual rite is a necessary one, a fundamental internal control practice. And whether it’s a third party vendor conducting the process or the parts manager overseeing departmental employees, there are only two possible outcomes: one, physical inventory is greater than that what is indicated in general ledger; or two, the GL balance is greater than what’s actually there.

The first is usually received with great relief, although it shouldn’t be. Inaccuracy is a problem. The cause of the disparity should be determined, so that it can be fixed or at least explained and doesn’t become the source of a bigger problem. But it’s when the GL balance is greater than the physical inventory that the commotion begins. Is someone stealing? Or just sloppy? One is more serious than the other, but both can cost the dealership a lot of money.

We’ve worked with dealers since 1984 and conducted hundreds of inventories, and in the vast majority of cases we’ve found the causes of deficient physical inventories are honest mistakes, most often parts provided for a repair job that aren’t recorded on the job order.

The easiest way to eliminate much of the hassle and most of the fuss associated with annual inventories is to reconcile more frequently than once a year. We recommend monthly. Deviations that occur within a period of 30 days are far easier to identify, and tracking inventory throughout the year makes the final annual reconciliation much simpler, more accurate and far less of a disruption. It can take as little as an hour a month using an Excel-based tool that identifies errors and helps pinpoint whether they are in the parts or accounting department. (We’ll send you a tool we’ve developed to assist the process. See contact information below.)

One common approach to monthly inventories is the process of cycle counts. Separate parts into 12 sections and count one each month. In addition to the month’s parts sector, spot-check other bins randomly. Most importantly, check high sales volume and high cost parts; high sales volume parts are typically those that don’t get listed on a repair order, and high-priced as well as easily marketed parts are more likely to be stolen. Obsolete parts, for both reasons, are rarely an issue.

We advise dealers finding disparities not to be hasty in accusing anyone of theft. The consequences of a false accusation can be devastating to both employee and dealership. If theft is expected, we recommend bringing in an outside party for an independent, objective inventory investigation. As well, install a better process, which starts with two practices: no one other than parts personnel should be allowed access to the parts shelves, and no part should ever be handed across the counter without being charged to a ticket.

Good communications between parts and accounting departments is also vital. If a parts manager buys parts from vendors other than the manufacturer, good communication ensures the parts are bought and sold at proper prices.

Dealers have hundreds of thousands, if not millions, of dollars invested in parts inventories. A parts manager’s number one job is to see that the dealership gets a proper return on that investment. Without monitoring controls and physical inventories, all the good work of a parts department can be for naught.

The Dealership Industry Group is happy to send you our Excel-based parts inventory program. Just call us at 317-886-1624, or email Rex Collins at rcollins@hbkcpa.com.

About the Author(s)
Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA. This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies. Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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