What’s the difference between inventory management and accounting systems?

July 15, 2020 8 min
Inventory management vs accounting systems

Alla Chernova, ABM Inventory Implementation Projects Head

New technologies bring new opportunities for business transformation and advancement. If we track the pace of changes in behavior and demand over the last five years, we will see a huge leap. Retail landscape is changing rapidly. Consumers are making more purchases online. People are looking for ways to spend less, so promotions and deals are starting to play a major role in retail.

To stay competitive and build a successful business in this environment retail business has to very agile and innovative, use modern tools and smart solutions.

For example, smart inventory management systems help retailers to manage inventory more effectively, avoid lost sales and release money tied in overstock.  

Some retailers, however, utilize the build-in modules of their existing accounting systems to manage inventory. So, what are the main differences between a specialized inventory management solution and a built-in module of an accounting system?

Basic accounting vs Inventory management systems

Accounting system is a very basic way of managing inventory. When we refer to an accounting system, we usually mean that this system keeps all documents in place, contains information on suppliers and contractors, tracks and records the operations and transactions.

It may seem that accounting system can equip a retailer with all necessary functions. Well, an accounting system is rightfully considered to be essential for any retail business. Being critical to retail business existence, accounting systems, however, do not provide opportunities for business growth and development, they simply serve as basic tools. Here is the main point - if a retailer wants his business to grow and develop, he needs to deploy more sophisticated and advanced instruments.

So, what are the differences between a specialized inventory solution and a basic accounting system?

  • accounting system has basic functions to support small retail businesses;
  • upgrading your existing accounting system (advancing or adding new functions) may be very costly and require extra human resources, IT specialists;
  • not having access to advanced tools and functions decreases productivity and forces your employees to waste time on manual tasks causing the likelihood of dissatisfaction followed by high personnel rotation;
  • analytics function is very limited.

On the contrary, inventory management systems were designed to automate inventory control, make it easier, smarter and faster, reducing manual routine processes. Automatic reordering and order sending will save time for your employees and money for you. Your team productivity will increase and you will be able to reallocate human resources to other tasks.

Basic accounting system

Basic accounting system

As we have already mentioned, accounting systems have a very reduced analytical toolset - usually, such systems can provide most basic and elementary reports, which can not give a big picture of business performance. Thinking big and analyzing your strategic performance indicators is important, and if you do not have enough tools to deeply analyze your business, you will hardly succeed.

As any retailer knows, you can keep high sales only if you can understand your demand, track top-selling and slow-moving goods, manage and calculate safety stock quantities and adjust your inventory to seasonal demand fluctuations. Performance analytics should be made for all your sales locations, outlets and suppliers. You should regularly track their performance and effectiveness.

Retailers need to understand these indicators at the deepest level in order to turn data into cashflow, increase sales and profitability, expand their business and stay cost-effective. To make a long story short, if you do not analyze your business deeply, you halt your growth and development potential.

Here comes another benefit of functional inventory management solutions. Specialized inventory management systems provide you the comprehensive toolset to deeply and thoroughly analyze your products and your inventory.

Inventory management solutions are equipped with dozens of built-in functions and features for different tasks - from data tracking and employee performance control to cloud interface and high level of accessibility, connectivity and integrability with other modules or solutions. However, when choosing an inventory software we would definitely recommend you to make sure it has powerful analytics and reordering functions.

ABM Inventory vs accounting systems (SAP, 1C): pros and cons

Accounting systems (such as SAP or 1C) usually have a built-in order calculator or a module which can be used for reorder quantities estimation. However, the majority of retailers tend to use smart specialized solutions for inventory management.

Inventory management systems calculate reorder quantities and automatically work out the needed quantities of goods to keep up with demand levels.

ABM Inventory tracks your sales history and automatically calculates the next reorder point and quantity, adjusting it further for your business needs and demand levels (either decreases or increases next order quantities).

You no longer have to perform manual complicated and time-consuming order calculations in spreadsheets. After your inventory system calculates reorder point, it creates an order and sends it to a particular supplier, according to supplies schedule. Everything is optimized, easy and automated. If you run a large retail business, you no longer have to perform reorder operations dozens times per day, do complex maths, send hundreds of confirmation and approval emails or spend hours on the phone with your procurement managers.

Each type of product requires has its own logistics patterns and handling algorithms. For instance, one category of goods may require supplies via distribution center or central warehouse, and the other may be handled using cross-docking handling flow. Perishable cargo delivery has its own requirements. Accounting systems do not allow you to filter and sort the orders or inventory per type to customize logistics and handling algorithms, while inventory management systems not only can diversify logistics conditions, but also combine and mix them for better efficiency.

Seasonal inventory/promotions management and demand spikes often top the list of retailers’ concerns. Forecasting, preparing, running and closing holiday or promotions sales is not an easy task, and if you are using accounting system you have to manually control its every stage. Seems like a nightmare, right? What’s even worse, you have to manually calculate your inventory and safety stock during unstable holiday sales. The trouble is most retailers fail to calculate right quantities, and end up with overstocks.

ABM Inventory uses predictive analytics to automatically adjust inventory levels for top-selling SKUs for a needed period of time, and returns stock level back to normal after promotion or season is over. The system uses intelligent forecast method, based on sales history, sales statistics of a last season, real-time demand etc.

Another difference between accounting and inventory systems is an approach to safety stock management. Retailers often use extra safety stock for attractive shelving and merchandising. Accounting systems allow you to enter static safety stock quantities which will be automatically reordered, even if you do not it. Inventory management systems use lean smart approach and help you to adjust safety stock quantities to your real needs. For instance, if you need to be sure that you have enough inventory for X days, the system will automatically calculate how much safety stock you need and you will not end up with unwanted items in your warehouse.

As we have already mentioned, analytics make a huge difference. The way data is presented is also very important. The majority of accounting systems use simple spreadsheets, so you will need a lot of man hours to read, compare, analyze and understand the indicators for each SKU. Inventory management systems have a user-friendly interface. Its easy-to-understand design allows to visualize all SKUs, all supply chain areas, orders, operations and inventory levels. You can easily track and find each product and analyze its sales/demand levels, keep an eye on delivery and ordering schedules etc.

ABM Inventory analytics report

ABM Inventory analytics report

The ways analytics are build also differ. Both accounting and inventory management system build their analytics on key indicators, such as turnover rate, sales and demand levels. Being critical to any retail business performance, these indicators alone can’t provide a bigger picture and help to assess inventory strategy performance. For this purpose professional inventory management systems use extra indicators such as “lost sales” and “overstock levels”.

Conclusions

Navigating through different inventory management approaches and systems is not an easy task. Each retailer shall carefully select right software based on his company needs, strategy and size.

Small retailers can use basic accounting system for their needs, however they should keep in mind that any business expansion will be costly, both in terms of human and time resource. Once you decide to develop your business, you will have to invest into a professional inventory management tool.

For medium and large retailers, smart and modern inventory management software is a must-have! It will help you to cut lost sales levels, get rid of overstocks and maximize your profits.

An example to illustrate. COVID-19 pandemic has led to unprecedented demand fluctuations. Retailers that were using basic accounting systems found it difficult and costly to quickly upgrade their software and failed to adapt themselves to volatile demand. Professional inventory management systems turned out to be more flexible and lean - its users managed to update their demand algorithms quickly without paying extra money to developers.

We recommend you to choose your inventory system wisely and consider customer support quality and support level. Study user reviews or ask company’s existing clients for a reference. In this way you will get a trustworthy review and make a right decision when choosing a reliable and trusted contractor to work with.

You can keep high sales only if you can understand your demand, track top-selling and slow-moving goods, manage and calculate safety stock quantities and adjust your inventory to seasonal demand fluctuations

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