Does Your Bucket Have A Hole In It?

I wonder how many of you look at the parts inventory value on your monthly Balance Sheet and take for granted that it is accurate? Surprisingly enough most dealers and GM’s do, but they shouldn’t, because many stores still do not run an accurate Monthly Reconciliation between the Parts Inventory (PAD) and the General Ledger (GL) to see if they are in balance. Also surprisingly, none of the major DMS systems have automated the PAD to GL reconciliation process. They provide most, if not all of the data necessary, but don’t perform the procedure for you. This means that you and your managers must provide the format and conduct the exercise based on guidance from folks like me, or your 20 Group moderator, or some outside source that provides management assistance.

Why do we need to do this?

I know, your days are already full with tight personnel restrictions, extended hours, and the vacation and flu seasons are upon you. Realistically speaking, this task doesn’t take that much time since, as I mentioned earlier, most of the information is already produced by the DMS. It’s just a matter of having the Parts Manager state the true net inventory position and then turn the report into the Controller/Office Manager for them to do the comparison and report to management. If that sounds over-simplified it is…to a point. There are up to eleven entries made by the Parts Manager, and two by the Controller; that’s it. If it takes more than 30 minutes monthly someone isn’t doing their job during the month and is being forced to do it at month-end. The typical target is to have a variance of less than 5%, plus or minus, which represents business in process at the time the month-end is performed. As long as you are within your acceptable tolerances you can reasonably assume that all is well in parts inventory land. If you are not within those tolerances then it is time to find out where the parts or money went, NOW!

How does a typical Reconciliation Worksheet work?

The process begins with the Parts Manager shortly after the month is closed. The following data is posted:

  1. Inventory value from the DMS Management Report (MGR/2213/Financial Analysis/etc.) The report is run after the month-end close and the Grand Total Value is entered. No extra work here.
  2. Value of Inventory NOT in the PAD. What is this? These could be used wheels/tires that were sent back to parts and charged to them without the manager’s knowledge or permission. They could also be office or detail supplies or take-offs from accessory upgrades. The key here is that these parts have to be in the GL, but not in the PAD.
  3. Parts receipted but not yet invoiced by the vendor. This usually happens at the end of the month with partial shipments or backorder releases.
  4. Parts invoiced but not yet received. These are typically parts that were billed with the original order, but were short shipped or shipped from another PDC.
  5. Parts on open RO’s and Invoices. Work in Process.
  6. Clean Cores if not included in the inventory balance. Some vendors track cores as a part number, but most do not and therefore the value is not in the PAD. Some management reports count them; others don’t and require some additional tracking.
  7. Dirty Cores waiting for return. Some DMS’ report this value, and some don’t requiring a manual tracking process.
  8. Bad Cores in the DMS. These are generally not returnable and need to be recovered from the customer, or scrapped.
  9. Damaged Parts Claims in process. These are parts that have been returned for credit but have not been paid yet.
  10. Returns in process. Different from #9, these are good parts that have been returned to the vendor for credit and have not been paid yet.
  11. Value of parts on Consignment. Most stores don’t have these, but some do and the liability for that inventory is what you post here.
  12. Appreciation/Depreciation Adjustments. Changes due to the Monthly Price Update.
  13. Plus/Minus Adjustments. Changes made to the inventory using DMS procedures to adjust the counts for things like Bulk Fluids.
  14. Report adjustments made for scrapping if they are not already reflected in the GL.

Next the Controller takes the above data and adds the following:

  1. The current GL value at month end. This is the closing value after all RO’s and Invoices for the month have been posted.
  2. Value of Pre-Paid Invoices. Any Special Orders that have been pre-paid have already been credited to the GL and have to be backed out to bring the accounts closer together.
  3. Write offs. Any adjustments for delinquent accounts, Physical Inventories, etc.

That’s all there is to it. Assuming that everyone’s been doing their job during the month this is not a difficult process, and as long as the two inventories are within your acceptable tolerance levels then you should be good to move onto the next month. If there are excessive variances then it’s time to find the reasons ASAP.

If you’d like an automated Monthly Reconciliation Worksheet you can download one HERE.

Written by Jim Richter

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