QuickBooks Inventory Management Limitations and Solution
Spoiler Alert: QuickBooks inventory management is the best for manufacturers, but only when paired with Katana - the Smart Manufacturing Software.
As a manufacturer, you must contend with the difficulties of running a business, scheduling production, inventory management (including raw material management) and, finally, administration.
The admin side of things can be intimidating. Especially when it comes to things like taxes. It gets even scarier when you realize filing your taxes incorrectly could have serious consequences.
This is why many manufacturing businesses use QuickBooks inventory management so they can keep track of their finances at the same time.
In this article, we’re going to investigate QuickBooks inventory management, how it works, the limitations, and what software you can use to overcome these challenges.
PRO TIP: Managing your inventory is more complicated than you might imagine. This is why we’ve put together a must-read inventory management guide to help you in your quest for more control over your manufacturing.
Can you Use QuickBooks for Inventory Management?
The short answer is yes - but the functionality is limited.
QuickBooks inventory management consists of tracking some of the costs to manufacturing and providing an evaluated balance sheet to track these expenses.
QuickBooks records your inventory item by the value it was purchased at (or how much it costs for you to make) increasing the value of the Inventory Asset account on your Balance Sheet report and increasing inventory (or Quantity on Hand) of said product.
Once the finished product has been updated as sold, the built-in inventory management software for QuickBooks decreases the value of Inventory Asset and the Quantity on Hand units for that item.
When you record a sale, the inventory management in QuickBooks increases the Cost of Goods Sold and records the Income from your product.
To figure out your gross profit, you'll need to check the difference between your COGS and your Income.
When using QuickBooks inventory management, it performs inventory evaluation using the first-in, first-out (FIFO) system to track any fluctuations in product costs and the COGS.
This might sound all confusing, but basically, all you need to know is that when doing QuickBooks inventory management, it tracks your finished goods and gives you an evaluation of their costs, profits, and losses.
However, QuickBooks can be used to track other manufacturing costs, such as the cost of labor and manufacturing overheads. But, to edit these you're going to need to access the settings page and look into your “Chart of Accounts”.
2. Non-Inventory Items
Simply, these are the nuts and bolts of your inventory. If you’re handling raw material, then this is where it’s stored. We’ll explain the complications of recording raw materials a bit later, but it mainly concerns recording the conversation of raw materials into finished goods.
These are the services you provide. Perhaps you sell a product, such as a piece of specialized equipment that needs to be installed on a prebuilt machine, and you might offer an installation service too. This is where you’d track these costs.
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How to Use QuickBooks for Inventory Management
QuickBooks breaks down your inventory into four categories:
1. Inventory Items
This is comprised of the items that you sell (and buy if needs be), allowing you to track those quantities. However, to be able to track them, you need to enable Inventory Tracking under your settings.
To enable Inventory Tracking in QuickBooks, go to the Gear/Cog icon at the top right corner of the screen.
Select “Account and Settings” and go to “Sales”.
In this window, you can find the option to enable tracking under “Products and Services”
You might be rubbing your hands together if you've been contemplating getting started with QuickBooks. Hey, we don't blame you, it's accounting software, and it's top-notch.
But, there are downsides to using QuickBooks inventory management, which we'll explore before you make any decisions.
Limitations of QuickBooks for Inventory Management
QuickBooks inventory management isn’t designed to support businesses that have huge quantities of raw materials or handle products that deal with more granule materials.
It would be awesome to conveniently manage your business from one place, and it’s the very reason you’re here looking into how to record finances and do your QuickBooks inventory management.
QuickBooks is awesome for accounting, but the QuickBooks inventory management system, it lacks a lot of features which are essential for manufacturers.
1. QuickBooks Inventory Management Isn’t Designed for Manufacturers
This is the simplest way of explaining the biggest problem.
Yes, QuickBooks inventory management is possible, but it isn’t designed to support businesses that run job shop manufacturing. If you solely depend on QuickBooks, you’re going to need to organize your routings for productions either in spreadsheets or with another tool.
2. No Production Scheduling
Once again, there is no feature for you to establish and save a master production schedule (MPS) within QuickBooks. Meaning you’re going to have to figure out your production planning and have it saved somewhere else. Which can be a pain for you and your teammates as this information will now be stored separately.
3. No Serial, Lot Numbers and Location Tracking
Okay, this isn’t 100% true, there is a module for location tracking on the more expensive QuickBooks packages. But, otherwise, the core QuickBooks inventory management feature doesn’t support any of the above which you’ll likely need as a product-making business.
4. No Bill of Materials
QuickBooks inventory management online doesn’t feature a way of writing and saving your bill of materials (BOMs). There are workarounds, such as creating items under products and services, but no built-in BOM creation module.
5. QuickBooks Cannot Convert Raw Material into Finished Goods
Once again, you can use the system to track sub-assemblies or group items together, which you’ll purchase together to make a final product. However, you’ll need to sell on the grouped item as the final product for this to work (which will be reflected on the customer’s receipt) or adopt a third-party QuickBooks raw material inventory system.
Think of it like this:
In QuickBooks - component A and component B represent the finished product
Basically, QuickBooks is fine for tracking your finances and inventory if it only consists of finished goods. However, if you’re a maker, it doesn’t support the most crucial element of your business, which is the manufacturing process your business follows.
You can probably see how this would be an issue for you.
This might be your initial response to QuickBooks inventory management after discovering these limitations.
However, QuickBooks is still fantastic, especially when it’s partnered with Smart Manufacturing Software.
Integrate Your QuickBooks Account with Katana Manufacturing Software
Inventory management software for QuickBooks can help you bridge the gap between accounting and sales, allowing you to overhaul your manufacturing capabilities.
Smart Manufacturing Software like what is offered by Katana allows you to seamlessly integrate your QuickBooks account, helping you to bridge the missing feature gap of the QuickBooks inventory management built-in system.
Firstly, once you’ve integrated your accounts, you can begin pushing your sales orders from Katana to QuickBooks (allowing you to accurately track your income) and generate invoices from the Katana dashboard. Useful for tracking expenses in QuickBooks and for sending off invoices to a supplier.
The video below will explain these features in more detail:
But, more importantly, integrating your QuickBooks with Katana allows you to have access to:
1. Real-time Inventory Updates
Our unique auto-booking system allows you to get a better understanding of your stock-levels. When a manufacturing order is created, Katana automatically takes any available material and allocates it to a project. The same goes for if you’re a make-to-stock business, but instead, a finished product will be committed to a sales order.
2. Production Scheduling
Katana’s production scheduling software uses a RAG system to give you an easy-to-understand, visual dashboard, so you can easily monitor the status of your production. A built-in task list allows you and your teammates to see what needs to be done and how long is left until an operation is completed. Finally, our nifty drag-and-drop feature allows you to reprioritize your work order for if a specific project needs to be completed first. Best of all, Katana will automatically redistribute resources to the new workflow.
3. Save Your BOMs
Speed up your production by saving your BOMs onto Katana, which will allow the software to automatically adjust inventory levels when future orders come in and let your teammates know what material is needed and what manufacturing processes need to be followed. If you sell multiple variants of a product, Katana can easily generate each possible variation when setting up your BOMs.
Puppy Cake was able to save nearly $20,000 in annual payroll by integrating Smart Manufacturing Software into their business.
How did Puppy Cake manage to save such a huge amount? It was because they were able to:
— Save 20 hours a week by not having to continuously count stock;
— Move away from tediously having to update spreadsheets;
— Fix mistakes made from errors made in spreadsheets; and
— Streamline their supply chain.
The bottom line is that we highly recommend you to consider QuickBooks for your business. However, make sure you use it for its strong point — tracking your company's finances.
QuickBooks inventory management has a clear feature gap for manufacturers. Bridge that gap with inventory management software which can smoothly integrate with your QuickBooks account.
You might be tempted, and you wouldn’t be the only one, to just do your inventory management with inefficient Excel spreadsheets. But, using spreadsheets is cumbersome and prone to business damaging mistakes.
Keep QuickBooks for tracking your finances. But, centralize the rest of your manufacturing business by integrating Katana Smart Manufacturing Software and optimize your businesses performance.
Why not try it out for yourself? Start a 14-day free trial, so you can see how much Katana can help your business.
QuickBooks Inventory Management FAQs
What is QuickBooks inventory management?
QuickBooks inventory management is a way to track your inventory, set alerts for when you need to reorder and get some insights into your inventory activity. QuickBooks inventory management covers inventory items, non-inventory items, products and services.
Can QuickBooks manage inventory?
The short answer is yes, but with some limitations. You can track inventory on a basic level with QuickBooks inventory management, but you will lack the full capabilities you will need as a manufacturer. These include bill of materials (BOM) limitations, no production scheduling and no batch tracking.
If you are a manufacturer you should integrate QuickBooks with a smart manufacturing software like Katana to ensure that you effective inventory management that is still effortlessly connected to your accounting.
What inventory method does QuickBooks use?
QuickBooks inventory management determines the value of your inventory using the weighted average cost with the amount debited to the Cost of Goods (COGS) when you sell inventory. The formula used to calculate the average cost is:
Average Cost = Sum of all Items ÷ Number of inventory items.
What is the best system for inventory management?
The best system for inventory management for your manufacturing will depend on your inventory and business needs. An effective inventory management system should allow you to fully manage your inventory in-line with your production and distribution needs, and be integrated with your e-commerce and accounting tools. Katana Smart Manufacturing Software allows you to manage your inventory from a single simple, but powerful dashboard and integrates effortlessly with QuickBooks to ensure that your accounting is automatically synced.