Financial Negative Inventory in Dynamics 365 for Finance & Operations

For most clients, the concept of the separate physical and financial flow in Dynamics 365 for Finance & Operations is a new concept. It is one of the very first things I like to explain to all SMEs (subject matter experts) on any of my projects. It doesn’t matter which functional area of the system you are working with, you need to understand what it means. It is as important if you are a buyer as it is if you are a customer service representative and anything in between that you understand what it means to have an item physically available or financially acquired.

The one setting that usually generates the same exact scenario in most projects is the ‘Financial Negative Inventory’ check box on the item model group. Please keep in mind that this blog post is talking about business scenarios that are NOT a retail environment.

When I start to explain that the setting of these boxes will determine whether the system will allow us to sell/consume more than what we actually have – one from a physical availability and the other from a financial ownership perspective, I also provide my recommendation of not allowing physical negative inventory but instead enabling financial. The general reaction from an accounting/controller team member is usually that they would prefer not to allow either. Why would we allow consumption/sale of something we don’t own yet?

This is the point where we need to discuss what financial ownership in Dynamics 365 for Finance & Operations means. If we allow financial negative inventory, it simply means allowing to process inventory that only has physical transactions for it in the system. A very simple example is if a vendor has shipped us some goods which we have received into our warehouse and system (=physical transactions and available physical inventory) but have not yet received an AP invoice for (=no financial transaction, no financial inventory). This is a very likely business scenario, most vendors prefer to mail/email the invoices along with the document proving delivery (most often a packing slip) that came back with the signature/stamp of your warehouse as well as the transportation company (if applicable). This can take days or in some cases weeks after physical delivery. Even if the invoice does come with the goods, as a result of different teams being involved and different verification/matching processes, it often takes a couple days before the invoice is entered into the ERP system.

During this period, if we do not allow financial negative inventory, it would be like the goods were not here at all. The system would not allow us to do any transactions with the goods. Let’s see a couple examples of what this means:

The basic scenario here is to have purchased some goods that have been delivered to our company, received into the ERP system but we have not received an AP invoice for just yet.

Now a customer calls and needs an urgent delivery of this item. The system shows it as available physical, so the warehouse will go ahead and try to process the sales order. The system will allow it to be picked, packed and shipped. But when the AR department tries to generate the invoice, here is the error message that will pop up:

So we got ourselves in a situation where we have shipped the goods but cannot invoice the customer for it until we receive the AP invoice. Less than ideal – and when this is explained, accounting/controller usually agrees.

The same will happen if the product needs to be consumed into a production order – system will allow picking list to be posted and production order to be reported as finished, but the very same error message will appear before we could end the production order (financially finalize).

Then if we take it a step further from here, we now have physically available product we have manufactured and the above scenario with a sales order will come into effect again – we can ship this product out to the customer, but we won’t be able to invoice until:

  1. the AP invoice for the raw material/material is received
  2. the production order then is ended.

Another situation that I usually like to demonstrate is the quarantine process. Although some companies might be ok working with the above mentioned restrictions on their sales invoicing and production, what happens when you have physically available inventory that you need to quarantine for some reason? To make sure it is not being used or sold and also to make sure it is not showing as available in the system and mess up MRP runs, etc. Unfortunately, the financial negative inventory check box has an impact on the quarantine orders as well.

You can put the goods on a quarantine order, you can start the quarantine order, but when the inspection is done, you are only able to report as finished. When trying to scrap or end the order:

At the end of the day, most companies would not benefit from restricting financial negative inventory, on the contrary it would cause headache and difficulty on an everyday basis. As long as the company restricts the physical negative inventory, that would allow sales/consumption of what is not physically available (making a mess of any weighted average inventory calculation if that is what you are using), allowing financial negative inventory will allow the company to freely transact with items that have been physically made available for them.

Allowing negative physical inventory might be beneficial in high paced retail environments, but as a general rule anywhere outside of the retail world, I do not recommend it. Please feel free to connect with us to talk about Dynamics 365 for Finance & Operations.

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