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Why SKUs Need to Be Part of Your Accounting Process

accounting basics

Your accounting and financial tracking are vital to the overall health of your business. Yet, it’s intimidating to calculate the sheer number of variables that play a role in determining finances. Everything from the bankers you work with to the employees you hire affects profitability. And, the tiniest accounting error can significantly impact your numbers.

Developing and regularly using SKU numbers is one of the greatest tools your small business or side hustle can leverage to improve accounting (and profitability).

SKUs vs. UPCs vs. Serial Numbers

SKU numbers may not seem very interesting or very critical to your bottom-line accounting. However, once you see how deeply integrated they are in your business operations, you’ll come to recognize their value.

First, you need to know what defines a SKU number. SKU stands for “stock keeping unit.” It is a code made of letters and numbers and is usually six to eight characters long. These numbers are designed to keep track of inventory. They are used heavily in both inventory management and point-of-sale (PoS) software as well as accounting software.

At this point, you may be confused about how SKU numbers differ from UPCs (universal product codes) or serial numbers. UPCs are 12-digit numbers that run along the bottom of barcodes on various products. UPCs are, as the name implies, universal, and can’t be unique to any one store. In other words, two companies selling the same products will share the same UPC for a given product but will likely have two different SKUs.

Serial numbers are unique to each individual product. They are usually used for electronics and other big-ticket items. If your store is selling 20 laptop computers of the same make and model, they’ll all have the same UPCs and SKUs. But, each of those 20 laptops will have a distinct serial number.

Advantages for the Accounting Process

So, why are SKU numbers good for your business’s accounting?

  • Loss tracking

    For starters, SKUs are one of your best resources for loss tracking. Because each SKU number allows you to track your inbound products, and track them quickly and easily throughout their journey to customers, it’s easy to determine where and how your products are disappearing.

  • Inventory-based decisions

    Inventory management errors are one of the three biggest causes of profit losses in retail businesses. Yet, SKUs make it much easier to keep track of inventory at each of your locations. This becomes critical the more products you have to track and the more locations you have. With accurate inventory numbers through a largely automated process, your team will be able to make smarter stocking decisions. You’ll lose fewer products, have a more reliable stock in each of your locations, and be less likely to make a bad development call.

  • Individual item locations

    Accounting can also determine advanced statistics based on the locations of various items. For example, they can see which stores are ordering the highest quantities of each product and determine where most products are being lost. As an added bonus, warehouse managers and store stockers will find it much easier to track down individual items. This can greatly increase your speed and profitability.

  • Reporting accuracy

    You know the importance of reporting accuracy, and SKUs can make those reports much more accurate. Because you’ll be scanning your items regularly throughout your operation with unique numbers for each item, you won’t have to worry as much about misleading or erroneous information. That helps create more consistent, reliable revenue projections. Plus, it enables smarter accounting decisions.

  • Customer service and marketing

    Though not related to accounting directly, it’s also important to note the benefits of SKUs for marketing and sales and customer service. SKUs can help you learn which products are being bought most frequently (and how). This information can be used to create targeted advertising. They can also improve our in-store experience since you’ll be able to locate in-store items faster or order them from the correct locations.

Creating SKU Numbers

You can generate SKUs any way you want; there are no fundamental limits on what formatting you use or how many characters are to be included. When deciding on a format, make sure you consider the application for which you’re using SKU numbers. For example, if you believe your cashiers will need to commit SKUs to memory, it’s a good idea to keep them short, easy to read, and memorable. But, if you’re working mostly in warehouses, and you have many different products, longer SKU numbers may be advantageous.

Once you decide on the length, select a format that allows you to embed some level of meaning into each section of your SKU code. You could split your code into three sections—a beginning, middle, and end—and associate each of those sections with a different element of meaning. For example, you could have the first two digits represent the broad category of the item, the second three digits represent a specific category of the item, and the final group of digits represents some kind of sequential order.

There are many different assignments and designations you could consider, including:

  • Store assignment and location. Track which products belong to which store or the location or department where they’re being held.
  • Sub-category identifier. You can also create groups of numbers that identify a sub-category. These might include “fruits” or “vegetables” within the “groceries” category.
  • Variation identifier. The last set of numbers or letters should take advantage of subtle variations between different products, such as color, size, or the type of item.

Miscellaneous SKU Tips

To get the most out of your SKU numbers, try these tips:

  • You can use SKUs again.

    Common sense might tell you that once you use a specific SKU number, you can never use it again. After all, these are meant to be unique identifiers. As long as you wait a few years between circulating items, you should be able to use old SKU numbers for new products. The only problem you might run into is customers returning several-years-old items that are no longer in your database.

  • Begin SKUs with letters, and definitely not zero.

    When assigning SKU numbers, it’s a good idea to begin them with letters. This will help your accounting team pick them out easier in a spreadsheet that’s likely full of other numbers. While you’re at it, make sure your SKU numbers don’t begin with zero. This is because some apps and software will misinterpret your zero to mean “nothing,” resulting in errors.

  • Work from broad to specific.

    The beginning of your SKU number should be the broadest, highest-level category. Subsequent sections of numbers should gradually work to become more specific. Ultimately, this results in the most specific, narrowest category you can qualify.

  • Avoid letters that look like numbers.

    You can automatically scan some SKUs. Accountants must enter others manually or review them in spreadsheets. Accordingly, you can cut down on errors by specifically avoiding letters that look like numbers. For example, the letter “I” looks like the number “1,” and the letter “O” looks like the number “0.”

  • Avoid using manufacturer numbers.

    To keep it simple, you might use manufacturer numbers — or an element of them — as your own. However, there aren’t many benefits from this strategy. Remember, SKU numbers should be unique for every business. Therefore, it can be confusing to duplicate SKUs from another business.

  • Don’t pack meaning into your SKUs.

    While it’s a good idea to imbue some sections of your SKU numbers with meaning—like using “GRC” for “groceries”—it’s a bad idea to overload your SKUs with meaning. This often results in SKUs that are far too many digits This creates more confusion for your accounting staff.

  • Shorten SKUs for manual entry.

    If you’re going to be manually entering your SKUs, try to minimize the number of characters used. The shorter the string of characters in a SKU, the easier it will be for people to remember and the less time it will take to enter. That’s going to save your team a ton of time and hassle.

Using SKU numbers to keep your business finances under control is one of the best decisions you can make for your brand, especially if you have a wide variety of products to track across locations. It takes time to set up a system capable of scanning, tracking and analyzing them. However, it’s worth the effort.

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