A Seattle 4-location apparel retailer had never reconciled physical inventory to books. After 3 years the $124K discrepancy was artificially inflating gross margin by 4.2 percentage points.
01The Situation
The retailer had opened her fourth location 18 months earlier. She had a nagging sense her 22.4% gross margin was not reflected in actual profitability. When she asked her bookkeeper to explain the margin, the bookkeeper pointed to the inventory account, which had never been physically verified against what was actually in the stores.
A physical count at all four locations revealed $124,000 less inventory than the books showed, a discrepancy building for three years, artificially inflating reported gross margin by 4.2 points.
02What We Did
We coordinated a simultaneous physical count at all four locations over a single weekend. Every discrepancy was investigated and attributed to one of four root causes: unrecorded shrinkage, improperly processed returns, uncaught vendor short-shipments, and write-offs flagged but never processed.
Each root cause had a specific fix. Three years of financial statements were restated to reflect correct inventory values. Tax returns amended for FY 2022 and FY 2023.
03Client Impact
The owner had been managing as a 22.4% gross margin business when it was actually 18.2%. Two product categories were repriced after the correction. Physical count became a quarterly event.
Breakdown
| Root Cause | Amount | Period | Action Taken | Status |
|---|---|---|---|---|
| Shrinkage unrecorded | $52,400 | 3 years | Shrinkage reserve implemented | |
| Returns not properly restocked | $34,800 | 3 years | Returns process rebuilt | |
| Vendor short-shipments | $22,600 | 3 years | Receiving audit implemented | |
| Write-offs never processed | $14,200 | 3 years | All write-offs cleared | |
| TOTAL | $124,000 | 3 years | All resolved |
What changed
$124K Inventory Discrepancy Resolved
Physical count at all 4 locations. Every SKU reconciled to accounting records.
True Gross Margin: 18.2%
Not 22.4% as reported. Two categories immediately repriced upward.
Four Root Causes Fixed
Shrinkage reserve, returns process, vendor receiving audit, and write-off review all implemented.
Three-Year Financial Restatement
All periods restated. Tax returns amended for FY 2022 and FY 2023.
The owner had been managing as a 22.4% gross margin business when it was actually 18.2%. Two product categories were repriced after the correction. Physical count became a quarterly event.
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