Effective financial management is the backbone of any successful business, and accurate accounting processes are crucial for decision-making, forecasting, and especially business valuations. Among these processes, monthly stock movement entries are vital in maintaining accurate financial records. These entries track changes in stock levels; purchases, sales, wastage, and adjustments, which directly impact the true profit calculations.
For businesses considering a sale, precise stock movement tracking is even more critical. The value placed on the business by the Purchaser is largely influenced by the business’s month-by-month financial performance at the time they are interested in the business, as this gives them a sense of short-term trends that may indicate longer-term trajectories.
It is impossible for a Purchaser to truly rely on the month-by-month management profit and loss statements when the monthly opening and closing stock balances are not journaled. As a result, likely, the seller may well be understating the true profit, which also works against them.
In this blog, we’ll explore why monthly stock movement entries are essential for management-level accounting and why they matter when selling a business.
1. Impact on Profitability and Financial Statements
Stock movements significantly affect financial statements, particularly the profit and loss (P&L) statement and the balance sheet. If stock movements are not recorded accurately, it can distort the cost of goods sold (COGS), leading to incorrect profit calculations.
How Stock Movements Affect Profit Calculation:
Opening Stock + Purchases - Closing Stock = COGS
A higher closing stock reduces COGS and increases reported profit.
A lower closing stock inflates COGS, reducing reported profit.
When businesses fail to track stock movement correctly, they risk misstating their actual profitability. This can lead to poor or misinformed decision-making.
2. Business Valuation and Due Diligence
If you're selling your business, potential buyers will scrutinize your financial records to determine the company's true profitability. Accurate stock movement tracking ensures the business's underlying profit is realistic and verifiable.
Key Reasons Stock Movement Matters in Business Sales:
Underlying Profit Accuracy – Adjusting for incorrect stock movements can lead to major discrepancies in financial statements, reducing buyer confidence.
Eliminating Overstatements or Understatements – If stock has been accumulated but not properly recorded, the profit figure may be inflated. Conversely, if stock losses or wastage are unrecorded, profits may appear lower than they are.
Support a Higher Valuation – A well-documented stock movement process reassures buyers that they are acquiring a financially stable business.
During due diligence, if buyers notice discrepancies in stock reporting, they may reduce their offer price, renegotiate terms, or even withdraw from the deal. Proper stock movement entries eliminate these deal flow risks.
3. Cash Flow Management and Stock Optimisation
Accurate stock tracking also helps businesses maintain a healthier cash flow by ensuring that stock is ordered in alignment with demand. We know most business owners know when to order their stock without stocktakes, however, there is always room for improvement here, and at least 50% of businesses we encounter have some dead or slow-moving stock on their balance sheet.
This is a direct consequence of “guessing”, and they increase the chances of:
Over-purchasing leads to excessive stock-holding costs.
Under-purchasing may result in stockouts, causing lost sales and unhappy customers.
Expired or obsolete stock may accumulate, leading to unnecessary losses.
For potential buyers, a well-managed stock system demonstrates that the business operates efficiently with minimal waste and optimized inventory management—a significant selling point.
Frequent stock-taking doesn’t have to be an onerous task, even if done manually. The hardest part is just getting started and doing it the first time. For businesses with 50 or more SKUs, parts, or components- there are many effective, cheap and easy-to-use stock management software’s available.
4. Avoiding Taxation and Compliance Issues
Inaccurate stock movement records can result in errors in tax calculations, particularly in industries where stock valuation impacts taxable income. Overvaluing stock may lead to higher tax payments, while undervaluing stock can trigger audits and penalties.
For businesses being sold, taxation errors from stock mismanagement can complicate the transition process, delaying the sale or leading to unexpected financial liabilities.
Final Thoughts
Recording monthly stock movements is not just an accounting best practice—it’s a necessity for businesses aiming for financial clarity, profitability accuracy, and smooth business transactions.
For business owners considering selling their company, ensuring that stock movements are recorded correctly enhances the credibility of financial records, reassures buyers, and supports an accurate valuation. A well-maintained stock management system signals financial discipline, making the business more attractive to potential buyers and investors.
By maintaining proper stock records, businesses can prevent costly errors, optimise operations, and maximise value; both for themselves and future owners.
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