Negative Inventory: How to Get Your Stock Back into the Positive
Many manufacturers might tell you that negative inventory is a problem that’s going to occur enough times that you might as well embrace it. However, the unfortunate truth is that it's a sign of bad management. That’s why we’ve looked into negative inventory, how to identify it and remove it from your processes.
Entrepreneurs have a lot on their plate when it comes to managing their business.
And the amount of work an entrepreneur needs to do increases once they decide to implement a D2C manufacturing business model into their company.
D2C manufacturers, regardless of company size, will need to manage their administration, finances, resources, production operations, sales, and supply chain management.
With so many processes to follow, a manufacturer can’t afford to make any mistakes and risk errors happening while also trying to meet their production and sales deadlines.
This pressure to meet deadlines can lead to mistakes, such as going into negative inventory.
This (bad) practice has been accepted by a lot of manufacturers as an unavoidable issue that needs to be corrected once the problem occurs, as opposed to stopping it before it happens.
However, the longer you put off dealing with your negative inventory problems, the longer you’re going to be making business decisions based on incorrect information.
Negative inventory left unchecked will lead to issues varying in severity, from a minor inconvenience to a production stopping problem for your business.
One of the reasons many manufacturers choose to deal with these problems when they arise is due to the difficulty of trying to determine what type of negative inventory your business is carrying.
But, have no fear! We’ve looked into the problem of negative inventory and put together an article about how you can identify and address your negative inventory.
PRO TIP: A quick way to solve inventory management issues is to use a free manufacturing excel template that has been designed specifically for manufacturers and can be repurposed when upgrading to Smart Manufacturing Software.
Let’s get into it and bust that ghost inventory!
What is Negative Inventory?
Negative inventory (sometimes referred to as ghost inventory) is when a manufacturer's inventory count suggests that inventory is below zero.
The reason your inventory has dropped below zero we'll explore later in the article since there could be several reasons as to why you see negative stock.
Regardless of the reason your inventory has negative stock, it’s a very common problem in the manufacturing industry, and some companies even use it as an actual business practice.
However, by embracing negative stock, you’re in danger of creating bigger problems for your business, mostly because you'll be making unnecessary decisions, such as ordering more materials or starting production, due to the faulty information.
Ultimately, negative inventory is a sign of poor management when it comes to processing sales and manufacturing orders, not as a part and parcel occurrence that manufacturers need to face.
And if you continue to allow the negative stock to generate in your inventory, you will always be risking:
— Selling items to customers without stock in-store;
— Selling items to customers without stock online;
— Performing a stock transfer with insufficient stock; and
— Ordering more materials even though some materials are already in production.
You probably get the gist of the issues by now.
But, knowing the issues is one thing. The best way to avoid negative inventory is to be pro-active and identify what makes negative stock occur.
PRO TIP: The best way to avoid negative stock generating is to implement production management software that can easily track and manage your inventory.
How does Negative Inventory Occur?
Now you know all about what is negative inventory, the next step is identifying where the negative stock comes from.
Negative inventory can occur due to:
This is probably the most common occurrence when looking into what is negative inventory. An example of a timing issue could be that a customer places an order for a product that’s out of stock, but you go ahead and mark the order as shipped because you know that production for the product will be wrapping up soon.
This issue is probably the easiest to fix because once production is complete, you can make the necessary inventory adjustments.
During manufacturing, you need to take into account byproducts, scrap amounts, production statistics, and batch numbers. Misunderstanding your manufacturing orders or accidentally creating a duplicate can lead to manufacturing either not enough or too many products.
Inventory at Multiple Locations
This can occur when dispatching products to the wrong warehouse or recording a sale from the wrong store. This negative inventory issue is scary because if you save the stock transfer wrong, it could look like warehouse A is missing 200 items, while warehouse B has 200 more items than it needs.
Item-Level Negative Stock
Backflushing, the process of generating and completing a manufacturing order (MO) after a batch production has finished so you can update your current inventory levels. Alternatively, an item-level negative stock might appear if there’s a product that you want to make to order (MTO) only when the demand is there.
So, now you know how negative inventory occurs, now you need to know about how to correct these mistakes and regain control over your inventory.
How to fix Negative Inventory
It might seem like correcting negative inventory is a complex process, considering how easily negative stock can form.
However, we’re happy to provide you with some comfort by letting you know that correcting negative inventory is pretty straight forward. Especially when you know what you’re looking for.
All you need to do is to go into your inventory management systems reports and locate which products or materials are displaying stock levels below zero.
From here, you can investigate your recent transactions to determine what led to the negative inventory appearing, and what type of negative inventory it is.
However, the corrections you’ll make will all be dependent on the type of negative inventory you’ve recorded:
Time – When correcting, such as marking a product as shipped before production has finished, it’s important not to overstate your amount and remember that missing inventory is still in your stock.
Location – If you made an error while recording a stock transfer, such as inputting the wrong values, the inventory might be at the correct location, it just needs to be accounted for accordingly.
Item-Level Negative Stock – This could be a serious one as it could indicate that there’s a problem with your manufacturing process. You’ll need to identify why your products or materials are coming in as negative stock during production.
But we understand this is still pretty vague, and we can’t go into specifics since manufacturers use all different types of inventory management software.
Although, the video below should give you a better understanding of how you can fix your negative inventory:
However, to help you understand how you might be able to fix negative inventory, we’ll take a look at how to fix negative inventory in QuickBooks Online as a lot of manufacturers use QuickBooks for manufacturing.
PRO TIP: Regardless of which software you’ve implemented, it's always considered good practice to brush up on your manufacturing inventory management to help you identify and address any negative inventory in your business.
How to Fix Negative Inventory in QuickBooks
First things first, you’ll need to log onto your account before you can locate your QuickBooks negative inventory.
Once logged on, to find your QuickBooks negative inventory, you’ll need to perform an Inventory Valuation Detail (IVD) report:
In the drop-down menu for “Dates” go ahead and select “All” to get a complete overview of your inventory transactions.
The “QTY On Hand” column will provide you with the data to determine where the QuickBooks negative inventory has taken place.
Once you’ve determined where the QuickBooks negative inventory happened, you can now go ahead and fix the problem by:
1. Selecting the negative inventory; and
2. Adjusting the dates of your bills and/or invoices so that the date of your bills is before your invoices. However, you can only do this if it’s legitimate.
It’s important to know how to fix negative inventory in QuickBooks, or on whatever software you use, because if you don’t address your negative inventory, here are the issues that you will face:
What Are the Consequences of Not Fixing Negative Inventory?
— Your cost of goods sold (COGS) will be incorrect, giving you improper profits and losses;
— Your companies capital consists of your current assets, minus your current liabilities, meaning if your inventory went down on the income statement, the working capital will go up;
— Mistakes in your Accounts Payable (AP);
— Bills for your inventory purchases could show up on your income and expense reports;
— Incorrect inventory amount on your Balance Sheet;
— Your Cash-basis Balance Sheet will be out of balance; and
— Your Vendor reports will have errors.
But, as they say in football (the American one, of course), the best defense is a strong offense. And the same could easily be said about tackling negative inventory.
Your best bet to avoid negative inventory is to improve your management practices and get set up with the right Smart Manufacturing Software.
Eliminate Negative Inventory with Smart Manufacturing Software
Katana Smart Manufacturing Software is the Swiss Army Knife of the manufacturing industry. The software has been built for manufacturers, using multiple tools to help any manufacturer, big or small, to get control over their:
— Production; and
— Supply chains.
But, more importantly, Katana helps manufacturers avoid generating negative inventory by giving you features such as:
The Auto-Booking System
Katana has a unique auto-booking system that tracks your inventory transactions automatically and in real-time, giving you an accurate update of your stock levels immediately.
So, let's say that you create a manufacturing order (MO), Katana will autonomously allocate available material to the open MO, so you know immediately if you have enough resources to begin production or if you need to order more materials.
In Katana, you can set a reorder point, which will allow Katana to highlight any products or materials which are starting to run low. Using reorder points allows you to keep safety stock to avoid confusion when stock levels reach zero.
Multi-location Inventory Management
With Katana, you can improve your multi-location inventory management, even if you’re using contract manufacturing to create some of your products. This feature allows you to monitor your inventory levels, regardless of where you store it, and perform stock transfers for products moving between locations.
Always remember that this could lead to negative inventory if you make a mistake, so be vigilant when sending and receiving stock.
Centralized Sales Channels
Many D2C manufacturers sell from different channels, from brick-and-mortar to e-commerce stores. Katana gives you a centralized point, so you can monitor all your channels from one, ridiculously easy to read dashboard. This includes integrating and synchronizing your favorite e-commerce platforms, like Shopify or WooCommerce, so you can manage your sales, all from one place.
Integration with Accounting Software
And the same goes for your accounting software, and this is an important feature when it comes to tracking negative inventory. Regardless of if you use QuickBooks or Xero, Katana can integrate with your accounts, so you can easily manage your business in Katana, and push all your invoices and bills to your accounting software.
If you want to get a better understanding of how Katana works, be sure to check out the video below:
All the tools above can help you avoid generating negative stock and help you optimize your business by giving you the features to implement lean inventory techniques into your business.
Negative inventory has the potential to become a homewrecker for your business. However, the idea is to start identifying negative stock as a problem and to take the necessary steps to remove this unwelcome guest from your processes.
How negative inventory will appear on your inventory management software will all depend on the type of tool that you’re using.
That’s why it's best to get set-up with a tool that has live updates so you can easily stay on top of your inventory's movement.
Tools like Katana Smart Manufacturing Software can provide you with these convenient tools and more! Don’t take our word for it, check it out for yourself, Katana offers a 14-day free trial, so you can explore the software for yourself and see how it can optimize your business.
That’s all for today! We hope that you enjoyed this article, and if you have any questions or concerns, feel free to let us know below or reach out to us on our social media channels.
And until next time, happy manufacturing.