Hi, I am preparing monthly management accounts using Sage 50 for a small company who deal in components. The product area of Sage is being used to update the stock list and sales invoices raised from that. Each month I run a stock valuation report and adjust the opening and closing stock nominals accordingly. But this is leading to wildly swinging profit and loss figures which the MD is questioning and I am wondering whether we should be using an accrual to spread the change in stock levels from month to month, or maybe just leave out the stock journal altogether, just adjusting it on an annual basis. Can anyone advise on the implications of either method or if I am indeed doing things correctly in adjusting the stock value on a monthly basis.
It could also depend upon purchasing patterns and sales cycles. August, for example: no-one buys anything; December generates most of some firms' annual income. Are you buying stock just before you need it, or are you holding quantities in order to get good prices or to meet unpredictable demand?
Maybe you need to compare cumulative figures with monthly ones to get a better perspective on your results?
Stock is accurate and kept up to date on a daily basis. All stock coming in is logged straight onto the system and when sold on the sales invoice is raised directly from the stock record.
I am happy that the problem is not down to inaccurate record keeping.
This suggests all the more that the volatility is due to buying and selling patterns, rather than how you calculate the cost of sales, because, if that's consistent, as it should be (FIFO, LIFO, or an average value), then the effect on profit will be, too.
No, you do not have to adjust the stock valuation every month: you can use a constant value if you like - you can do whatever you want with management accounts, so long as it is helpful in deciding how to take the business forward.
By using a constant value for stock, your Gross Profit will be under/overstated (compared to using actual stock figures) according to whether stock itself is over/under-valued. Also, the Balance Sheet will be distorted (compared to a financial balance sheet), Current Assets and Capital & Reserves being the sections affected. Depending on the assumptions you use, you could also affect debtors and creditors, and even cash flow. But it is a mistake to try to match the accuracy of formal accounts, because management accounts are best used to identify trends so that reliable predictions and forecasts can be made
... and we all know forecasts go wrong after the very first transaction.
