Small businesses often estimate their inventory. If you operate your business on the basis of inaccurate inventory figures, however, you may experience stock outs -- running out of products when customers want them. The other problem is that you may carry too much inventory, thus reducing your profits. Measure the accuracy of your inventory variance estimates with an eye toward increasing your bottom line.
Count your inventory. This is called the count method. Using this method, you count all items in inventory, and compare that total with what your records say you should have. Subtract the smaller number from the larger. Example: Records show 92 items and you actually have 98. You are off by 6 units. Divide the result of your subtraction by the accurate count: 6 divided by 98 equals .06. Multiply by 100 and you find that your variance is 6 percent.
Use the gross dollar variance method. Count each item and value it by how much it cost. Compare this to the figure you expected from your records. If you expected 100 items valued at $1 and find only 99, you have a $1 variance inaccuracy.
Use the net dollar variance method. Count your inventory and value it at cost. Compare this with your expected number valued at cost. Assign a positive or negative number to the difference, instead of just noting how much you are off. Example: If you find 100 items valued at $1 and expected 99 items at $1, your inventory is over by $1, or +$1. If you had expected 101 items, your inventory would be under by $1, or -$1.
Use all three methods to track the accuracy of your inventory variances and pinpoint the source(s) of inaccuracies. The count method, the gross dollar value method and the net value method each give a different picture of how inventory records are kept. Calculating the accuracy of your inventory variances using all three methods can help you determine if the problem lies in product picking or data entry, for example.
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