Ideally, when you do a stock count, the number of stock items should be the same as the number registered in your inventory system. If these numbers don’t match, we call it inventory variance.
Inventory variance is the difference between the theoretical inventory (the inventory of stock in the books) and the actual inventory (the inventory when you perform a count). Discrepancies can be explained by factors like employee theft, improper counting, or imprecise registration of stock items.
Inventory variance is important because it allows companies to track the differences between what they expected and what their actual inventory levels are. This information can be used to analyze any discrepancies in order quantities, pinpoint areas of overstock or understock, and more accurately forecast future needs. It also allows organizations to identify possible mismanagement issues within their supply chain and take corrective action to improve processes accordingly. Having a good understanding of inventory variance is essential for optimizing operations and maximizing profitability. Additionally, it can help companies manage their cash flow more effectively by avoiding unnecessary stockpiling or over-ordering of supplies. By accurately tracking inventory variance, organizations are better able to ensure they have the right amount of products in stock at the right times. This helps to keep costs and disruptions in check by avoiding stock-outs or excessive storage costs. Ultimately, inventory variance management is essential for optimizing operations and financial performance.
Most organizations use software systems to track their inventory levels and identify any potential variances. Companies can also use manual processes, such as physical audits of their warehouses, to cross-check the accuracy of their data. Once any discrepancies are identified and addressed, companies can then develop action plans to minimize inventory variance in the future. This may include reviewing current ordering processes, implementing new procedures or systems, or negotiating with suppliers to increase order frequency or better optimize delivery schedules. By taking a proactive approach to managing inventory variance, organizations can ensure they have the right products in stock when needed while also avoiding costly over- or understocking.
Some factors that could disrupt the inventory variance are:
1. Obsolescence of stock – Inventory can become obsolete if it is not sold or used by a certain expiration date, resulting in an unexpected variance.
2. Incorrect pricing – If there is incorrect pricing on inventory items, customers may end up paying too much or too little for the items. This can lead to unexpected variances in inventory values.
3. Damaged or defective goods – Inventory that is damaged or defective may also require additional costs for repairs or replacement, leading to an unexpected variance in the value of the inventory.
4. Theft and pilferage – Unauthorized removal of inventory can also lead to unexpected variances in inventory values.
5. Changes in market demand – Unexpected changes in the demand for certain items can lead to an unexpected variance in the value of inventory if it is not adjusted accordingly.
6. Poor inventory management – Inefficient or incorrect inventory management practices, such as inaccurate counting and tracking of inventory, can also lead to unexpected variances in the value of inventory.
By understanding and managing these potential sources of disruption, businesses can avoid or minimize their impact on inventory variance. This can help them maintain accurate records and more reliable financial reporting.