DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Selling Inventory Not Invoiced, COGS & Profit Margins


#1

The following scenario happens quite regularly and creates big problems for Profit & Loss Statements (and also has tax ramifications due to net profit being artificially inflated).

  1. Customer orders something not in stock
  2. We submit a Purchase Order to the manufacturer
  3. Manufacturer sends us the goods
  4. We invoice the customer and ship the goods
  5. Amounts show up under accounts receivable but COGS is not adjusted until we receive the invoice from the manufacturer
  6. Invoice is received and entered up to a month later and COGS is adjusted, causing Net Profit to drop

When trying to determine daily, weekly and monthly profitability, this causes Net Profit to be artificially high and thus we are unable to accurately determine our profit margins.

Our current system will use a historical average cost in COGS until the goods are actually invoiced and the amounts are corrected. This leads to significantly less fluctuation in Net Profit and more accurate reporting. The only way to achieve the same effect in Manager is to falsely put in a purchase invoice which causes additional problems:

  1. This is an additional step when creating a sales invoice, which must be done only if the quantity is becoming negative. If it is forgotten just one time or done when it does not need to be, even more problems are created.

  2. When the purchase invoice is actually received and entered, if the person entering it does not realize there was already a purchase invoice entered in, we have a duplicate entry = big accounting problems (i.e. someone accidentally pays it twice after seeing it under accounts payable) since it appears POs are not linked to PIs except for just entering in the ID - you cannot look at a PO and see all the PIs linked to it.


#2

What you describe is not unique to Manager. It is the behavior associated with average cost inventory accounting in all systems. It does not produce inaccurate reports; it produces reports containing inherent lag under some circumstances. The type of system you describe, however, does produce inaccurate reports, because it uses estimates of cost of goods based on historical information rather than the actual cost of goods. Being able to get a report sooner does not make profitability numbers more accurate. It makes them different.

All inventory accounting methods have their pros and cons. In the case of average cost accounting where purchase invoices lag sales invoices, you have cost being delayed until later accounting periods. But just as the costs of a particular sale might be delayed, costs of earlier sales are also delayed into the reporting period when the instant sale occurred. Whether this actually distorts your profitability picture in a meaningful way depends on the size and frequency of such purchases compared to the volume of other business.

The real question involved here is how rigorously you apply the fundamental tenet of accrual accounting: revenue is recognized when it is earned, and expenses are recognized during the period when the revenue they are associated with is recorded. If you are going to sell and invoice for inventory you don’t own yet, you have to face the prospect of more complex accounting structures and frequent adjusting entries.


#3

Agreed that they are inaccurate; however, temporarily using historical COGS information creates reports closer to actual profit than reporting no COGS. The current way Manager is set up, those sales appear as pure profit until the purchase invoice is entered.

Could you clarify what you mean here? I’m not sure I follow the bold part.

While we have a considerable amount of stock, as we list close to one-hundred thousand items we are constantly quoting and invoicing items that are not in stock. Depending on the day, over half the invoices we create could be for items not in stock. Therefore, in short-term reports, this absolutely distorts our profit reports.

Correct, and our fiscal year end reports should not report any “guesses” based upon historical data. Only concrete data should be reported. However, on a weekly Inventory Profit Margin report, it is extremely misleading because there are no expenses (COGS) associated with the revenue (inventory sales). The data that report shows is the following:

Sales	Cost of sales	Profit	Margin

Some items will show a huge profit and huge margin because only some of them were sold out of stock and the rest were sold on-order from the manufacturer.


#4

Yes. Just as costs of current sales of items not yet purchased are delayed until a later reporting period, costs of prior, similar sales are delayed into the current period. So, to some extent, what you lose to current deferrals you gain back from prior deferrals. I am not saying this is good accounting practice or desirable, only that it happens and reduces the impact of present deferrals.

This suggests that average cost inventory accounting may not be an appropriate choice for your company. Were this to happen in only a few cases during a quarter, for example, the distortion would probably be insignificant. In your case, it is not.

This is true. And perhaps, as a result, the combination of high volume of sales of unowned inventory and your desire for profitability reporting over very short time periods renders Manager an inappropriate choice of accounting system. Some of your other posts indicate you have considerable investment in customized systems. You say you list nearly 100,000 inventory items. Manager has focused on small businesses. Maybe your needs exceed the capabilities of the program as it currently stands.


#5

Since we’re in Canada (less options due to the way taxes are structured) and do not want proprietary business information on cloud systems, other than cloud systems run by us, we’ve been looking for accounting software that meets the following criteria:

  1. Can handle large number of inventory items
  2. Sales orders and quotes can be processed quickly
  3. Live (or close to live) reporting is available (which it is in Manager, via the Summary tab)
  4. The software is not prohibitively expensive, especially if it is billed on a yearly basis
  5. Multi-business, multi-user and not charge per user / month
  6. An API to be able to integrate our systems with
  7. Can handle Canadian tax requirements
  8. Proper handling of backorder situations
  9. Customer history and inventory item history
  10. User permissions

There are more, but those are just the ones I’ve been able to think of off the top of my head at the moment. Manager ticks a lot of those boxes, and is actually much easier to use than most other systems I have looked at. For example, I also looked at ERPNext which does extensive reporting and tracking and is free when you host it yourself, but there are many steps to process a single order and our accountant finds it rather complicated to obtain the reports she needs; thus it is not practical for us to use.

I personally have built all of our custom systems, which handle website quotations, orders, customer management and call system integration (someone calls and a notification pops up on the computer as the phone rings so the representative can pull up their information with one click) as well as a few other proprietary tools. I have been reluctant to create an accounting module as one bug can have serious profit and tax implications. Additionally, while I am quite adept in mathematics and understand basic accounting principles, I am not an accountant. We were hoping to integrate Manager with our current system and just use Manager for accounting purposes and inventory management.

I’m planning on exploring the option of rolling out our own as the initial backend programming to track accounts and transactions is quite simple, and then see if I can generate the proper reports (a bit more complicated). I hope we can still end up using Manager, I’ve just been getting a list of things from our accountant and a sales manager that may not work with our workflow and I’m trying to remedy each problem as they come up. Our current system, while it does everything we need, is many years old and starting to run slow (and we’ve found a few bugs over the years that each need time consuming workarounds).


#6

With your skill set, I think the API (when fully rolled out) might enable you to address all your needs. But your expectations are so high, I’m not sure the program on its own will ever fulfill them. Of course, that’s a decision you have to make based on your own situation.

The one thing I think you can count on is ever-increasing capability from Manager. When I adopted it 5 years ago, I thought it was nearly perfect for my business. The little nits disappeared a long time ago, and it keeps becoming even more perfect.


#7

That’s exactly what I’ve been hoping. However, problems such as this one and the inventory tracking workflow really are based upon the core code of the accounting system. Problems such as how customers, quotes, and orders are entered and the information entered can definitely be handled by our system and entered into Manager through the API.

We do have high expectations for our new system as, obviously, an accounting system can make or break a business. I certainly hope I do not come off as demanding new features or changes, and I realize that @lubos has many users to worry about, not just us. As a fellow developer, I understand what it’s like when users ask for unending changes without any knowledge of the backend. I’d happily make these changes myself except I do not have access to the source code, obviously. I think that Manager is an awesome program and @lubos has done a great job - just trying to report potential problems or improvements as I see them, as I want Manager to continue to improve!