Inventory represents a significant and strategic item in the financial statements of any manufacturing company. This time, let's focus on the issue of inventory aging. How can we approach the topic wisely?

In a manufacturing business, maintaining a steady level of inventory – whether raw materials, semi-finished goods, or finished products ready for sale – is key to ensuring smooth operations. In uncertain times, few companies choose the Japanese ‘just-in-time’ model, which relies on delivering production components exactly when needed. The experiences of recent years – marked by the pandemic, the war in Ukraine, and various economic disruptions – show that those organisations best able to ensure business continuity are the ones that come out of crises stronger. What does this have to do with inventory? Simply put: you need to have it.

How to effectively manage inventory?

First and foremost, it’s worth carefully designing the procedure for introducing inventory into the company and clearly defining from the outset how it will be recorded in the inventory management system. The tools used by the entity should enable accountants to quickly extract delivery dates, shelf lives of specific items, purchase prices, and other parameters that influence the cost of finished goods – thereby affecting the business profitability of the entire organisation.

In our experience, many companies do not devote as much attention to this issue as they should. As a result, during the analysis of financial statements, the auditor may, for example, lack sufficient data to reliably determine the timing or the quantity and value of inventory aging.

Consequences of improper inventory aging

If the system does not allow for easy identification of delivery dates or expiration dates of inventory, this can result in exceeding shelf lives and significant losses in stock – that is, in warehouse inventory. Such losses, often amounting to millions of złoty, are among the biggest challenges for manufacturing companies. If an internal audit reveals that the software and procedures in use do not allow for easy identification of such situations (or only allow for it partially), this poses a real risk and should be addressed as soon as possible with the support of enterprise risk management specialists.

Improper inventory aging carries financial consequences as well. The purchase prices of individual batches of raw materials or components may vary – especially when a company procures them using foreign currency. Labour costs can also fluctuate over time. How many companies have proper solutions in place to manage pricing? How many have developed various scenarios for estimating the final cost? Among our clients, entities using these useful procedures and good practices are growing in number, because after completing the audit of financial statements, statutory auditors from RSM Poland always present a number of recommendations for the company's management along with the opinion. And those companies that decide to implement them, quickly notice the benefits.

Naturally, poor inventory management can lead to other issues as well. It's also worth highlighting that a lack of information about how long inventory has been stored can result in underestimating write-downs for expired, obsolete, or damaged stock. In turn, this leads to overstating the value of current assets and, consequently, presenting a misleading picture of the company’s financial position. 

Without knowledge of the inventory rotation order, it is difficult to apply cost flow methods such as FIFO or AVCO, which can lead to inaccurate calculation of the cost of goods sold – and consequently, to a distorted financial result for the entity.

What other risks does the lack of a structured inventory aging system pose for businesses?

A lack of control over inventory aging in a manufacturing company carries significant financial and operational risks. It also increases the likelihood of using expired raw materials, which can lead to quality issues in finished products, customer complaints, and even product recalls.

If the production planning team lacks reliable information about which materials should be used first, the company may face production delays, material waste, and additional operational costs.

Therefore, listening to the advice and warnings of statutory auditors – and developing appropriate procedures along with a system for monitoring warehouse inventory – is crucial for effective cost management, liquidity, and process efficiency within the company.