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The Importance of Absolute Variance
Every business that deals with inventory must account for variance between their stock ledger and actual on-hand inventory. According to the National Retail Security Survey, the average retailer loses about 1.38 percent of their inventory to shrink, a loss that totals about $50.6 annually. Shrink, whether from internal or external theft, may be the biggest source of variance and consternation for retailers, but it’s far from the only one. Before a company can understand where it’s variance is coming from, though, it has to understand what it is. To do that, one crucial piece of data is absolute variance.
Defining absolute variance
Businessdictionary.com defines “absolute variance” as follows:
The expression of a difference between the usual cost and actual cost of an item or the difference of a projected budget and actual costs as an absolute number; the variance without respect to a negative or positive sign. Negative and positive variances do not cancel one another out when using an absolute variance.
To apply this concept in an inventory context, you can simply replace “cost” with “stock.” The crucial factor, as compared to net variance, is that mistakes on opposing sides of the stock ledger don’t cancel each other out. It’s important to consider absolute variances for precisely this reason. With net variance, you can end up with a situation where two wrongs appears to make a right, even though they shouldn’t.
Why absolute variance matters
If that sounds complicated in theory, it’s quite simple in practice. Let’s say, for example, a vendor sends a retailer two more pieces of that item than was ordered. Later that week two of that same item gets stolen. When it comes time to reconcile the on-hand inventory with what’s listed in the stock ledger, recording the net variance only will indicate that nothing’s amiss. From that imperfect piece of data, a business owner can overlook operational errors that are hurting their company in multiple ways. In this example, calculating absolute variance would reveal two flaws where net variance would uncover zero.
In today’s multi-channel retail environment, there are countless ways for variances to negate each other. Large data aggregates are valuable snapshots of a company’s health, but they aren’t a substitute for discrete pieces of information that focus on specific aspects of a business. Understanding where variances are coming from allows a business to address problems in a targeted way, rather than simply wondering why the inventory units don’t add up.
Get absolutely empowered with AccountingSuite
AccountingSuite’s robust suite of inventory management features allow you to analyze inventory trends on both micro and macro levels. You’ll be able to track vital indicators across all of your retail channels and supply chains in real time, including absolute variance. The comprehensive and readable reports provide crucial analytic insights that will inform a company’s actions going forward. When it comes to accounting for inventory, AccountingSuite stands a class above other software solutions.
If you’re a retailer or have clients in the retail space, you already know that stock is the lifeblood of the sector. AccountingSuite allows you to see just how healthy a company’s inventory really is.
Head over to our inventory management page for more information on how AccountingSuite can help retailers, wholesalers, and manufacturers run a better business.
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