Stock valuation: perpetual or periodic? Do you know what each item earns?

Hook

Boss, a question that stings: you sell so many different things — can you say which one makes the most money and which one is losing? If you cannot, it is usually because the stock ledger is not being managed. Today we cover stock valuation: quantity, unit cost, and how the cost gets tracked.

Two methods: perpetual and periodic

There are two schools for stock. Periodic — you only record how much money you spent on goods and do not track the pieces; at month end or year end you go into the store and count, then take opening plus purchases minus closing to work backwards to the cost of what was sold. Simple, but for the rest of the time you are blind: how much you make on each unit sold is invisible along the way. Perpetual — every batch in and every piece out updates the quantity and unit cost immediately, so at any moment you can see how many pieces are in the store, what they are worth, and what the cost of what you sold was. Today's cloud systems — Bukku, Xero, QuickBooks — run perpetual once the stock module is switched on. Is your system tracking quantity and unit cost for you? If not, you are still driving blind.

Where reality gets awkward: units, bundles, BOM

The principle is simple; reality is awkward. Three common traps. One, the unit changes — you buy a carton of 24 cans and sell them one can at a time. The conversion has to be set in the system: 1 carton equals 24 units, or the quantities will never tie. Two, bundles — three items packed into one hamper. The cost of each item in the hamper has to travel out with it, or the hamper looks like a great seller while the cost is still lying in the books. Three, buying parts and selling a finished product — you buy tyres, frames and chains, and you sell a bicycle. That needs a bill of materials, the BOM: it tells the system that one bicycle equals these parts in these quantities, so when one is assembled, the parts come out, the finished item goes in, and the cost follows. How do you measure material used? Go a step further and there is activity-based costing, allocating cost by activity — but that is factory territory. Today we stay on the trading account: buy in, sell out. The manufacturing account gets its own lesson.

How it runs in Bukku

Using Bukku as the example, a trading business runs like this. Every item gets a stock item record with an SKU code — that is "one thing, one account" from the previous lesson, in stock form. The business flow follows the documents: the customer enquires, you raise a quotation; it is accepted, you convert it to an invoice; you deliver, you raise a delivery order. Down that chain the quantity is deducted automatically and the income is recorded automatically. On the buying side, the purchase document goes into the system, and quantity and unit cost go onto the stock item. So every sale records two things at once: how much income, and how much cost. That is the point of perpetual — margin, by transaction, by piece, by product, available whenever you want it.

Why it is worth doing

Get to that point and you start seeing things most bosses never see in a lifetime. The same busy month, and product A returns forty percent while product B is being sold at a loss. What sells best is not necessarily what earns; what earns may be the one you have been neglecting. Trading profit by item — pricing, purchasing, clearing stock, dropping a product line: every one of those decisions now has something to stand on. That is what running a business on numbers means.

To close

In summary: stock has to be tracked by quantity and unit cost, and perpetual lets you see it any time. Set up the unit conversions, the bundles and the BOM. Quotation, invoice and delivery order form one chain, and margin comes out per item. How the system should be set up, how to code the SKUs, how to sort out old records — grab a coffee first and talk about your business. For the accounting, come to LTT. Next lesson: the manufacturing account — raw materials, labour and cost allocation. Factory owners, do not miss it. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.