By Marilou C. Vroman, CPA, CFE
As the year comes to an end, many dealers start preparation for the annual tasks that go along with turkey with all the trimmings and holiday greetings. One of those tasks is preparing for the annual parts physical inventory. While not all dealers are required to, or even opt to, perform parts physical inventories, we strongly encourage the process since it provides an extra layer of internal control and helps validate the integrity of the inventory amounts on the dealership financial statement.
The parts physical compares the physical parts on hand on a given date to the perpetual inventory in the DMS and adjusts the quantities on hand accordingly. The resulting inventory value will also be compared to the inventory balance in the general ledger and adjusted for common differences such as outstanding returns for credit, price appreciation/depreciation, work in process and so forth. It is common for a variance to exist between accounting and the parts perpetual records and fluctuate from one period to the next. It’s important to note neither a positive or negative variance are good news (though we tend to prefer a positive variance) A variance is 3% or less of the total inventory value would typically be deemed acceptable.
In preparing for the year end, there are several steps parts managers and controllers can take now to get organized and mitigate potential variances:
Identify and separate obsolete parts, cores, prepaid special orders and warranty returns.
Conduct frequent bin checks and update perpetual records.
Submit invoices to accounting and review open purchase orders and packing slips.
Reconcile manufacturer and parts vendor statements.
Follow up on outstanding returns for credit.
Inspect work in process and open parts invoice reports for accuracy.
One of my favorite general managers used to quote “the five P’s” to motivate proactive approaches to success. Today, let’s quote the seven P’s: “Proper parts physical planning prevents poor performance.”
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