For a lot of businesses, an item that has a negative balance for quantity on hand is normal. It represents a situation where they are playing catch up with their information. For example they send stock out the door as soon as it arrives, before they tell their system that it arrived. Eventually, you would hope that all the information is entered and the balance eventually reflects something realistic.
I expect that there will always be businesses that accept that they have negative on hand stock, for some reason.
So, if you do accept negative on hand, what challenges does this present and what should you be aware of?
- The total value of stock on hand in your inventory system, and reflected in the general ledger, will be lower than it should be. Let’s face it, you’re reducing a level of stock that you don’t have.
- The cost attributed to sales may not be correct since the only known cost may be different from the true cost. So the sales history and cost of goods sold postings may be incorrect. Additionally, should the goods be returned at a later date then this will create more costing issues.
- When you return to a positive balance there will need to be an adjustment made for the difference in the cost on hand to the cost received. For example assume that you have -10 on hand @ $2.00 (I.e. -$20 inventory value). A transaction to bring in 12 units @ $2.25 occurs (I.e. $27 total value arrives). The balance of stock on hand becomes 2 @ $2.25 (I.e. $4.50 inventory value). There must be an adjustment of $2.50 to make the ledgers and cost balance.
- Re order and planning systems can give confusing results with a negative on hand balance. Assuming that it is simply a timing issue the shortfall will most likely be covered by the unconfirmed receipt. However, this will still have an effect on the time horizon meaning that projected requirements may not occur in the correct time bucket.
- If timing differences are not processed prior to the stocktake, then when they are processed after the stock take it immediately makes the stock levels wrong.
- Warehouse management systems (WMS) and lot/batch tracked items are the natural enemy of negative on hand. The purpose of a WMS and lot/batch tracking is physical traceability which does not live well with a physically impossible situation like stock that has negative on hand.
Yes, there may be some real reasons why you have, and accept, negative on hand balances. But you have to realise that there is a cost to be paid.