Money Talk: Stock shock - and what you can do to avoid it

There was a news story last month about a well-known, publicly quoted fashion retailer which announced that it may have overstated the value of stock on its balance sheet by some £25m and the consequent appointment of lawyers and accountants to investigate and determine what happened and just how big a hole there really is in the balance sheet. This was barely a year after Patisserie Valerie went belly-up with what was eventually found to be a £94m ’black hole’ in terms of missing cash and over-stated assets. Inevitably the same question gets asked: how in today’s high-tech retail world, where everything is supposedly barcoded and scanned at every stage, with all of the data fed in real time into an integrated ’enterprise management system’ could any retail business ’lose’ significant amounts of stock, especially without anyone noticing until much later?

old-fashioned theft

The first and most obvious answer might be simple, old-fashioned theft. You receive stock from suppliers and put it in a warehouse or storeroom; everything is booked in at the right price and sits there on your management accounts at cost price. Except that someone has a key to the storage area, and leaves the doors open for light-fingered friends to come in and help themselves.

Of course, a sensible retailer would be undertaking random spot checks of individual stock quantities against ’book’ stock records at regular intervals but when did you actually last do that? And if you’re running several sites, and don’t have time to wander around storerooms counting boxes of confectionery or bottles of wine, who do you trust with performing stock checks for you?

Let’s ignore deliberate theft. It’s still possible to end up with over-stated stock values without anyone deliberately doing anything wrong. Although we’ve mentioned barcoding, it’s true that in many particularly smaller retail businesses, while they have the facility to scan incoming and outgoing stock, in practical terms this may not be used for everything, for various reasons. Someone will have to manually input a product code, a quantity and perhaps a value possibly at several stages: delivery from supplier, maybe transfer between storage at different sites, and even at the point of sale.

errors creeping in

At each stage it’s possible for errors to creep in, and the difference between the cost/quantity of an outer and an individual packet can be in the order of several magnitudes. Would you or your site managers be able to spot these errors just by looking? Site operators of the ’old school’ used to occasionally wander around their shop and storeroom and have a ’feel’ for whether the stock value in their management accounts was realistic.

That was relatively easy when they were looking at car batteries, patio sets and 5ltr tins of oil or antifreeze. With today’s much larger forecourt shops selling a very wide range of food, tobacco and alcohol, it isn’t so easy to remember the cost of every item. Again the only real answer is to spot count particular product lines, then check both the quantity and the price against your stock records adjusting the book values to reflect the actual count and invoice price.

non-sellers

There’s another possibility and this is often the most contentious: everything’s properly secured and recorded so what you see in the storeroom is reflected accurately in your accounting records at cost. But what if you’ve been left with a lot of seasonal stock that simply didn’t sell (say at Christmas)? The only way to shift it is to cut the marked price drastically and put it in the bargain bin by the checkout; and if it’s perishable you’ll only be able to do that for a week or two at most. Suddenly the value in your stock records and accounts, while historically correct, is likely to be more than you can realistically expect to sell at. Unless you adjust that value down to a realistic level, your stock is over-stated. The same applies to any old, slow-moving products; the stock records need to be adjusted from cost to a realistic sales value even if that is zero!

This sometimes causes anguish to retailers and arguments with auditors. No one likes admitting that something on which they spent good money may simply not be sellable for anything like it actually cost.

Professional, external stock auditors tend not to have the same attachment and are more likely to give you a realistic value. If you need one, start by talking to your accountant