When you create products in your accounting software you should almost certainly be able to enter the cost, if so make the effort.
Without the cost your accounting software's financial statements will only show a fraction of the story.
The cost that you enter should, in most cases, be as close as possible to the average cost of that item that you have in stock. For example -
What is average stock? Let's assume that you have 1 bolt in stock and it cost you $1.00. You then go out and buy another bolt for stock and the cost has shot up to $2.00. You now have 2 items in stock that cost a total of $3.00. Therefore your average cost is $1.50 per item. When you sell one of these items the software will take into account that the cost of that sale was $1.50. Most accounting software systems will adopt this approach
There is a separate section towards the end that looks at the different types of product cost and what they mean.
Another important issue when setting up your products in your accounting software is closely related to whether there are re-order reports in your accounting software and a Purchase Order module that is linked to the re-order system, and you intend using either or both.
This issue basically deals with the ideal maximum and minimum stock that you wish to keep of a particular product. It can be done several ways but the most common would be -
Maximum and Minimum. Let's say you want a maximum number of the item in stock at any time of 20 and a minimum quantity of 10. When the stock level falls to 10 or below the system will tell you to order whatever quantity that takes it back to 20. The minimum level is also known as the re-order point.
In a similar situation your accounting software may only work to a maximum stock level in which case whenever your stock level falls below 20 it will show an order quantity to take it back to 20. "Your system may allow you to enter different levels based on seasons. For example if it gave you four separate seasons then you would need to give it four different levels. This method is more common in industries where there can be large fluctuations in sales depending on season as in summer and winter, as in Christmas and non Christmas periods etc.
If you operate in a country where you charge GST or similar and later claim this tax back then the cost of the product should be shown excluding the tax.
For example a bolt costs $5.00 plus $0.50 GST then show it as $5.00. This example applies to Australia If you are not sure about your own situation then check with your accountant.
Products Module - Additional Uses
You will have already set up your products in your accounting software before you started invoicing so that part should already be done except maybe for some fine tuning that you need along the way.
To reap the full benefits of a products module you will need to record into your accounting software your stock as you receive it.
One of the more important aspects of the products module though in any accounting software is that it keeps a track of your stock.
Many business people that I have met over the years have seen this as being of not much value to their overall day to day operation.
Before you arrive at this conclusion consider some of the possible benefits of keeping a stock control system from the following
Reflecting and recording the true value of stock and the cost of your sales can directly impact on your profit and, or, loss and, therefore, the amount of tax you pay at the end of the year.
You have various reports on hand in your accounting software to show what stock is running low, therefore you can re-order from your suppliers before you run out and possibly lose sales.
Stock control in your accounting software should show you which are your faster moving items and therefore where your money in stock should be more heavily invested.
Stock sales reports in your accounting software should tell you when you last sold a product therefore have you got stock (and maybe lots of that product) that is taking up valuable storage space which could be used for better selling items, or tying up valuable cash in slow moving items.
Is stock mysteriously disappearing? Is someone helping themselves without your knowledge.
Is product running passed its effective use by date or shelf life.
Are some of your products seasonal so are you stocking the right quantities for the peaks and reducing stock for the off seasons.
Is some of your stock shop soiled and not really in a condition to portray your business image.
Many accounting software packages will create re-order reports for you of what the system thinks you may need without you going out there and physically counting. By all means check the suggested order but let the accounting software take some of the grind out for you.
Some businesses can have an enormous amount of capital tied up in stock and it is important to make sure that this capital has been invested wisely. Could some of this value be liquidated to pay off some debt or to invest in new equipment and so on.
Look at what you have and, if necessary talk to your accountant.
I have been involved in all aspects of the accounting software industry for over 20 years. I run several websites that specialize in various subjects including
http://www.diyaccounts.com.au that gives advice on all aspects of accounting software from choosing, setting up and using it. Amongst other sites that I run are
http://www.sense-now.com that helps newbies understand what internet business will probably work for them and what won’t.
http://www.oumas.com.au is all about arts, crafts, hobbies, wine and beer making and much more.
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