The Stock Mess Lurking in Your Client Files Waiting to Blow Up

4 Jun

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If your SME clients are still managing stock on spreadsheets, skipping stock counts, or struggling to explain their gross margin fluctuations, you already have a clear advisory opportunity. Inventory might not be the most exciting topic in practice, but it remains one of the biggest sources of accounting errors, tax headaches, and compliance risks. Unfortunately, it is often neglected until SARS begins asking questions or the bank demands accurate financials.

As a Business Accountant in Practice, your role has evolved. You are no longer just a numbers person. You are a systems fixer, a compliance advisor, and a trusted business partner. If you want to charge more for your services, build stronger client relationships, and grow your practice, inventory is a powerful place to focus.

This article equips you with the technical foundation to tighten your inventory knowledge, identify weaknesses in client processes, and transform this into practical, billable advisory work. The content is based on IFRS for SMEs Section 13 but is tailored for the real-world environments in which you and your clients operate.

Understanding What Inventory Actually Is

According to IFRS for SMEs Section 13, inventory includes goods held for sale, items currently in the production process, and materials that will be used to create goods or provide services. In practice, this means anything from products on the shelf to the consumables in a service vehicle.

However, not everything that looks like inventory qualifies. Biological assets before harvest, financial instruments like shares or bonds, and some commodities held at fair value are not covered under Section 13. Getting this classification right is essential, as mistakes can affect financial statement accuracy, VAT returns, and tax submissions.

Inventory Valuation and the Costing Dilemma

Inventory must be measured at the lower of cost and net realisable value. This is not optional. At year-end, your clients must assess whether inventory is worth less than what they paid to produce or acquire it. If it is, they must write it down.

The cost of inventory includes direct costs such as raw materials, transportation, and import duties. It also includes conversion costs like direct labour and allocated overheads, based on normal production capacity, not actual output in a quiet or busy period.

There are also other costs that qualify, such as packaging or customisation required before a product can be sold. However, certain costs must always be excluded, including administration expenses, sales and marketing costs, and interest arising from deferred payment terms. These costs are expensed immediately.

A common mistake is to include abnormal wastage in inventory costs. For example, if 10 percent wastage is expected but a fire destroys 40 percent of stock, only the expected portion can be included in inventory. The excess loss must be written off.

Selecting the Right Costing Method

IFRS for SMEs allows the use of FIFO and weighted average cost. These cost formulas help determine the value of inventory when items are interchangeable and not tracked individually.

For businesses that handle high-volume, low-value items or where it is impractical to track exact costs, estimation techniques are permitted. These include the standard cost method, the retail method, and using the most recent purchase price. These methods are only acceptable if they closely approximate actual cost. LIFO, however, is not allowed and should never be used.

Whichever method or formula is applied, it must be used consistently. Mixing methods across similar types of inventory undermines credibility and can distort reported profits.

Inventory Impairment: A Commonly Skipped Step

At each reporting period, entities must assess whether any inventory is impaired. This involves evaluating whether it can still be sold for a price that justifies its current carrying value.

When inventory is damaged, obsolete, or unsaleable at full value, it must be written down to net realisable value. If market conditions improve later, a reversal of part or all of the impairment may be possible. However, the inventory value may never exceed the original cost.

Operational Realities That Undermine Compliance

The most severe inventory issues arise from process failures, not accounting errors. Small businesses often lack segregation of duties, with one person responsible for ordering, receiving, issuing, and recording stock. This creates a risk of fraud and mistakes.

Record-keeping is often manual, outdated, or incomplete. Many clients still rely on Excel spreadsheets or even notebooks. Physical stock may be stored offsite or in shared spaces with no documentation.

Stock counts are skipped, rushed, or performed without proper cut-offs. Roles and responsibilities are often unclear. With no written inventory policy, ad hoc decisions take the place of structured control.

These operational issues have accounting consequences. They affect the accuracy of cost of sales, stock values, and VAT claims. Yet they can be resolved, and as the accountant, you are in the perfect position to offer these solutions.

Turning Inventory Mess into Advisory Revenue

Your clients do not need another spreadsheet. They need systems that work and policies that prevent expensive errors. This is how you can help, and how you can charge for it.

Begin with a documented inventory policy. This should set out valuation methods, explain what costs are included or excluded, define roles and responsibilities, and describe procedures for stock receipt, issue, and counts.

Design proper internal controls. Recommend or implement segregation of duties and approval structures. Suggest basic stock issue forms and documentation flows.

Help your client choose inventory systems that suit their size and complexity. Even simple tools can significantly improve record-keeping and reduce errors.

Offer to supervise year-end or cyclical stock counts. Provide reconciliation services and explain variances. Use this work as a gateway to regular advisory check-ins.

Train both operational and accounting staff. Make sure those who handle inventory understand how their actions impact financial statements, and vice versa.

Red Flags That Signal an Opportunity

Look out for clients who have frequent write-offs, unexplained variances, or rely entirely on spreadsheets. Check if they have a formal inventory policy.

Ask whether stock levels align with sales activity. Be alert if there is one person managing the entire process. These red flags indicate that the business is at risk—and that you can step in with a solution.

You Are Not Just an Accountant—You Are the Fixer

Inventory is one of the most misunderstood and mishandled elements in small business accounting. Yet it has a direct impact on profitability, tax compliance, and audit outcomes.

You are ideally positioned to lead. Not by selling a product, but by solving a problem. When you offer real solutions to real problems, your clients will not just thank you. They will pay you.

Access the CIBA CPD on Stock Shock, Fix the Inventory Mess Before It Costs You, Effective Inventory Management: Accounting, Stock Levels, and IFRS for SMEs here

Stock Shock: The Mess You Can't Afford to Ignore

Stock variances. Write-offs. Inventory reports that don’t add up.

If your month-end feels like a guessing game and you’re tired of firefighting poor inventory records, you need to watch this.

This high-impact, 2-hour CPD session is practical, direct, and built for accountants in the real world—whether you’re managing inventory in your own business or trying to help clients dig themselves out of stock chaos.

Here’s what you’ll learn:
✅ How to apply IFRS for SMEs inventory rules without getting lost in technical jargon
✅ What practical stock controls should look like (and why most small businesses get them wrong)
✅ How to link physical stock counts to accounting entries—and avoid compliance headaches
✅ Ways to turn stock variances into insight, not just write-offs
✅ Advisory tips for using inventory management as a value-add service for your clients

🎯 CIBA Members: Access the recording FREE via your CPD portal
💰 Non-Members: R345 incl. VAT

🧾 Includes 3 CPD units | Category: Accounting | Format: Recording

👉 Watch here now, clean up your inventory records, and stop leaving money (or stock) on the table.

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