Why Your Inventory Reports Don't Match Reality

Now, if this sounds familiar, this video is for you. Let me show you why inventory numbers are often wrong and how to catch it before it costs you big. By the end of this video, you'll know exactly how to check if your inventory numbers are trustworthy, why they're probably not, and what you can do about it this week. Keep watching.

0:46 Why inventory accounting is different

The problem is that your reports are built on operational chaos. Because here's the thing about inventory accounting. It's different from everything else in your business.

When you buy office supplies, you walk into Office Depot, you buy something, you expense it. Two steps, done. But when you buy inventory, you're starting a journey with about 20 fail points between the purchase and your financial reports.

You order from a manufacturer overseas. It ships, it sits at a port, it clears customs, and it gets transported to your 3PL. Your warehouse receives it, some of it gets damaged in receiving, it sits there for three months. You sell some, some gets returned but sits in a different area. Some gets pulled for marketing events and nobody records it. Some gets bundled into kits, some expires or becomes obsolete.

Every single one of these steps has a financial impact, and every single one is a place where reality and your reports can drift apart. Your accountant can't see any of this. They're not in your warehouse. They don't know what got thrown away or damaged or stolen or pulled for samples. So your reports are only as good as the information flowing from your operations. And if your operations has gaps, your reports will be wrong.

1:53 What wrong numbers cost you

Now here's why it matters, and this is what happens when your inventory numbers are wrong.

You can't make pricing decisions. You think you're making 60% margins when you're really only making 30%. So you drop your prices to compete, and now you're losing money on every sale.

You can't decide which products to push. You're spending ad dollars on products that are actually unprofitable because your costs are wrong.

You can't forecast your cash needs. You don't know how much money is tied up in inventory versus how much is available to spend.

And you definitely can't answer the most important question, am I making money?

Here's the kicker. Your inventory is probably worth more than the cash in your bank account. Most ecommerce businesses are cash poor and inventory rich. All your money is tied up in product. Now that's a whole other topic called the cash conversion cycle, and we're not here to go into that right now, but you can watch this video to learn more. Just remember, if you don't know the real value of your inventory, you don't know the most important thing about the health of your business.

2:55 The two trust tests

So how do you know if your numbers are trustworthy? There are two tests you can use.

Test one is the consistency check. Pull your financials for the last six months. Look at your gross margin percentage. That's your sales minus the cost of goods sold, divided by sales. What you want to see is consistency.

For instance, Nike, a publicly traded company, the last five quarters were 41%, 42, 40, 41, 44. That's pretty close to a flat line. Warby Parker was 54%, 54, 56, 54, 55. A little movement, but it's still pretty tight. That's what good inventory accounting looks like.

If your gross margin is jumping around wildly, like 40% one month and 60% the next and 30% the month after that, your cost of goods sold calculation is broken. There might be a good reason. Maybe you did a huge Black Friday sale and margins dropped. Maybe you wrote off damaged inventory. But there should be a story, because if there's no story, your numbers are wrong.

3:54

Now test two is the year end adjustment. At the end of the year, or at any point, just do it. You should do an inventory count. You compare what you thought you had to what you actually have, and the difference is your adjustment.

If that adjustment is more than 10% of your total inventory value, you have serious operational problems that are creating financial blind spots. A 10% adjustment on a $1,000,000 inventory balance is $100,000. That's a massive hit to your profitability that you didn't see coming, and the goal is to get that number as close to 0 as possible.

If you're consistently off by big numbers, it means inventory is walking out of your warehouse, getting damaged, getting returned and not logged, or being pulled from marketing without anyone tracking it.

4:36 Landed costs and why they drift

And there's one more thing that makes your inventory numbers wrong, and that's your landed costs.

Let's say you buy a product from your manufacturer for $5. That's your buy cost. But that product doesn't magically appear in your warehouse ready to ship. You pay for overseas shipping. You're paying tariffs. You pay for inland transportation. You pay for insurance. Maybe you pay for additional packaging. By the time that product is sitting in your warehouse ready to sell, your true cost might be $13, not $5.

And here's where it gets tricky. Every time you reorder, those costs can change. Shipping prices spike. Tariffs change. Your order size is different, so the per unit cost shifts. If you're only tracking buy costs in your system, your gross margins are wrong. If you think you're making 80% margins when you're only really making 40%, that's a problem. And this is why sellers often tell us, I'm selling more, but I'm keeping less. The numbers just don't reflect reality.

5:26 Common reasons inventory data goes wrong

So let's recap some of those most common reasons why inventory data goes wrong, and then we'll talk about what you can do about it.

As I mentioned before, inventory goes missing. Maybe you're not tracking damaged goods. Products are pulled from marketing events but never get recorded. Sometimes it just grows legs and walks off on its own.

Another issue is lost returns. Returns come back to the warehouse, but nobody updates the system.

Untracked stock adjustments can also create problems. Someone pulls a bunch of units for a trade show and forgets to tell anyone.

Now, duplicate SKUs is a sneaky one that can also come up. You're buying under one SKU but selling under different SKUs for each channel. Your systems don't talk to each other and this confuses things.

A big culprit is landed costs not being updated. Your buy cost stays the same, but shipping doubled six months ago and nobody changed the product cost in your system.

Spreadsheet breakdowns are common. You're trying to manage this manually and it only works until it doesn't.

These aren't small mistakes, these are profit killers.

6:21 Three things to do this week and what changes

But here's something that you can do right now to find out if your inventory numbers are trustworthy.

Step one, run the consistency check that we talked about before. Pull your P&L for the last six months. Calculate your gross margin for each month. As a reminder, that's sales minus COGS divided by sales. Write down the percentages. If they're all over the place, you've got a problem. If they're consistent within a few percentage points, you're probably in decent shape.

Step two, check your top 20 SKUs. You don't need to count your entire warehouse right this moment. Pick your top 20 best selling SKUs and go count them physically. Compare that to what your system says you have. Calculate the percentage difference. If it's more than 10%, you have operational gaps that are costing you money.

And step three, audit your product costs. Pick your top ten products by revenue and for each one, calculate the true landed cost. Take your buy cost and add shipping, tariffs, inland freight, and any other costs to get it into your warehouse. Compare that to what's in your accounting system. If those numbers don't match, your margins are wrong and you're making decisions based on bad data.

Do these three things this week. It'll take you a few hours and you'll know exactly where you stand.

7:31

Here's what changes when you fix this. You stop guessing if you're profitable, because now you know one way or the other. You can make smart decisions about pricing because you know your true costs. You can forecast accurately because your margins are predictable. You can get financing or sell your business because your financials make sense to buyers and lenders. And you stop staying up until 3:00 AM wondering where $300,000 went.

One of our clients told us, we finally feel good about understanding our financials. That's the goal. Not perfection, just clarity. If your inventory reports don't match reality, the reports are wrong.

But here's the good news. You've already done harder things than this. You've built a business. You've figured out manufacturing and logistics and marketing across multiple channels. You can figure this out, too.

Start with those three steps I gave you. Run the consistency check. Count your top 20 SKUs. Audit your product costs. These three things will tell you if you have a problem and how big it is.

If you find out your numbers are off and you need help fixing them, we work with 7 and 8 figure ecommerce brands on this exact problem every day. The link to get in touch with us is in the description. Otherwise I'll see you in the next video.