What is a physical count of inventory?
A physical count of inventory is an actual count of all the products that a business stocks. This is a thoroughly coordinated process, which includes separating, counting items and recording the results. Where there are differences between the counted amounts and the numbers recorded in your inventory books or software, updates are made to reflect the result of the physical count. A physical count of inventory is a federal tax law requirement.
Beyond getting ready for tax season, taking a physical count of your inventory has many additional benefits such as:
- Forecasting sales – The results of your physical count on inventory can assist in helping to create an accurate business budget.
- Managing theft – Physical inventory counts help you to reconcile your sales and your orders. Inconsistencies could be the result of either customer or employee theft.
- Serving customers – Accurate stock levels help you to fulfill customer orders in the timeframe that you’ve promised.
Taking a physical count on inventory will provide details about the accuracy of your book inventory. Discrepancies between the physical and book inventory should lead to further investigation.
Possible reasons for a difference between the inventory recorded on the books and what has been physically counted include:
- Unrecorded markdowns
- Wrong classification of sale items
- Incorrect recording of items received (or no recording at all)
A physical count of inventory will only be suitable if it’s done carefully. An inaccurate count can result in serious negative consequences for your business. Where the physical count of inventory at the end of each year is exaggerated, this will result in inflated gross and net profits, which could mean that you pay more income tax than necessary.
A poor physical inventory process can have a direct impact on your business profits. Buying decisions will be based on wrong information. This may result in the unnecessary purchase of a type of item, which could become dead stock, especially if the items are seasonal in nature. On the other hand, if the physical inventory inaccurately records that an item is well-stocked, the buyer will hold off purchasing more, which could result in the loss of sales.
Physical count of inventory methods
Given that a bad physical count of inventory can cause a host of problems, you should be meticulous about carrying out this process.Before you begin to think about taking a physical count of your inventory, you need to decide on the method that you will use.
You have the option of:
- Manual completion – This method involves using count sheets and pencils to record inventory numbers manually.
- Electronic counting – Technology like QR codes, mobile, and cloud software allows businesses to use barcode scanning to send information from a smartphone to the cloud.
Both manual and electronic physical counts of inventory must be carefully managed to get a true picture of your stock levels.
21 steps to taking a physical count of inventory
Incorporate the following steps when you’ve decided on the method of taking your physical count of inventory. Below are the steps you should take to ensure that your physical count of inventory is accurate.
1. Plan ahead
Apart from carrying out the mandatory physical count of your inventory for tax purposes, you’re free to undertake these as often as you want. You can choose to physically count your inventory monthly, quarterly or at the end of a reporting period.
After you’ve decided on a date, make sure you give your employees enough notice because doing physical counts of inventory is normally done outside of conventional business hours. If you’re going to perform the physical count of your inventory during business hours, notify your customers by putting up a notice on your store at least five days in advance.
2. Select counters
The important job of taking physical counts of your inventory should only be done by the most conscientious employees. Use both new and experienced employees to provide checks and balances for the counting process.
3. Schedule and train counters
Hold training sessions to inform your team about the importance of a physical count on inventory. Create a written physical inventory count procedure and include details about how you’ll achieve a clear cut-off point for moving stock for an accurate count. Educate your employees about best practice and how the process will work.
Count teams are normally made up of two people, one person who does the counting and the other doing the recording. Provide your team with their schedules with as much notice as possible to ensure that everyone will be available at the designated date and time.
4. Inform all storage locations
Where your business holds stock in outside storage or on consignment, notify the relevant third parties that they should also conduct a physical count of inventory on the specified date.
5. Get count tags
Buy enough two-part count tags from a physical store or online to cover the amount of inventory you expect to count. The inventory tags should be numbered in sequence, so they can be easily tracked.
6. Stop warehouse movement
Separate all recently received items so that they won’t be included in the count. If possible, postpone deliveries to the warehouse, so that there will be no fluctuation during the count.
7. Review in advance
Evaluate your inventory a few days in advance to make sure that everything is in order. Check for incomplete or missing part numbers and items that are in a condition that would make it tricky to be counted. Make the necessary amendments to get your inventory ready for the physical count.
8. Map your store
Using pen and paper, sketch where every wall, display, rack and shelf is. The storage and backroom should also be included on your map. Allocate a separate number for every display, rack, and shelf. These numbers will signify a different section. Your tracking sheets should match the sections on your map.
The more sections you map out, the easier the count will be. Mapping out your store in preparation for your physical count on inventory will help you to allocate your employees to different sections.
9. Label shelves and boxes
Where products in boxes and on shelves are not visible, attach labels so that employees are clear that these products should be included in the physical count of the inventory. Before the count begins, ensure that everything is marked and labeled appropriately. Failing to deal with loose items can be the source of headaches and frustration after all items have been counted.
10. Categorize items
Group items into a logical order so that similar categories can be counted together. Creating a structured system of items will help to make the counting process quicker and more accurate.
11. Figure out ‘rogue’ items
When planning your physical count on inventory, you’ll come across some items that appear to have no allocated place in your store. You need to decide how to deal with items that don’t have a definite home. Such difficult to place items can be the result of being:
- Displayed for visual merchandising in the store window.
- Transferred from other stores.
- Returned items.
12. Carry out a pre-count
Before the actual day of the physical count of your inventory, get a head start by counting some items in advance. After a pre-count has been done, store the counted items in sealed boxes. If on the day of the actual physical count, you find broken seals on boxes that have already been counted, the items will need to be recounted.
13. Arrange refreshments
As well as receiving their normal pay, reward your employees with food and refreshments for taking part in the physical count of your inventory. Physically counting inventory can be a boring process, so providing snacks will give your employees a much needed energy boost.
14. Remind your employees
When the day of the physical count of your inventory finally arrives, give your employees a refresher of what they learned in training. Reiterate that this is a very important process and, despite the absence of customers in the store, serious work still needs to be done.
If you’ve made some changes to the locations of items, walk your employees through the store to avoid confusion. Hand out instruction sheets that describe the counting process in easy steps. Although there shouldn’t be any items without prices or tags, stress the importance of collecting such items in a designated area, so that they can be dealt with last.
15. Demonstrate the process
Take the lead and show your employees how to properly take a physical count on inventory. Your employees should use the pencils that you supplied to complete their sheets. Give them an example of a completed sheet and review their first attempt to check that the sheet was completed correctly.
16. Designate count areas
Use the map to allocate different sections of the store to the count teams. Check-off the areas that have been counted on the map to avoid double-counting.
17. Start the count
The count team is made up of two people. After the first person counts, the second person completes the count tag with the following information:
- Item description
- Part number
- Unit of measure
When the count tag is completed, the team attaches the original to the inventory item and keeps a copy.
18. Confirm tags
Subsequent to finishing a section, the count team hands in the tags to the person in charge, who will confirm that all tags have been completed thoroughly and none are missing. The count team will move on to new sections after the person in charge is satisfied that the items in the current section have been counted accurately.
19. Check your items again
Carry out spot checks of sections to find out whether items were counted correctly. If this audit produces an error, take the opportunity to double check every section. Given the importance of a physical count of your inventory, going over what has already been counted will be worth the effort.
20. Transfer tag information
Part of the count staff should include employees who will input the count tag information into an online form. Just like the count team on the shop floor, the data entry team should also consist of two people to ensure the accuracy of the entries.
21. Analyze reports
Recording the results of the physical count of your inventory in electronic format will help to analyze the results more efficiently. Depending on the software used, you can sort the results using different headings. Your inventory reports will help you to see whether there are any disparities between the physical and book counts.
You can then formulate an action plan to reduce any disparities. Compile physical count inventory reports over a given period to identify possible trends. For example, is there an area in your store that has a particularly low count? This area could be a hotspot for customer theft. The results of your physical count of inventory should impact every area of your business – from visual merchandising to financing.
Other option: Mobile inventory count
The steps above detail how to carry out a physical count on inventory using good old-fashion paper and pencil. Physical inventory accounts can also be carried out using smartphones. This process normally takes less time than the manual approach. The benefit of using smartphones is that employees can use their own smartphones (or any other mobile device) to scan the items.
A smartphone-enabled physical inventory count includes the following steps:
- Divide the store into sections and assign a team to every section.
- The employee scans the item in their allocated area with their smartphone.
- Where there are multiple items that are exactly the same, you can advise your employees to scan the first item and enter the number of items.
An advantage of using a smartphone for a physical count of your inventory is that items do not necessarily need to be batched together. The inventory software will categorize each line item by different batches or by specific employees. Doing a physical count of inventory with smartphones means that you’ll have real-time updates on your count. A running feed will show what is being scanned and any errors can be addressed.
Information from the scan is saved on the smartphones, so employees can have a break and return to counting without compromising any information. After the physical inventory count is completed, the data is available for you to analyze without the need for manual data entry. If your employees don’t have work mobile devices, you’ll need to get their permission to use their smartphones for your physical inventory count.
The method you use to carry out a physical count of your inventory will depend on factors like the size of your business, the number of employees you have available and whether your staff are willing to use their mobile devices for business purposes.
The big picture
Irrespective of whether you use manual or electronic tools, regular stock-taking by physically counting your inventory is a crucial aspect of running a successful retail business. Thorough planning will make the actual physical count less tedious and, more importantly, more precise. The more physical counts on your inventory you undertake, the better your technique will become. More importantly, you’ll be able to take corrective and preventative action to protect one of your most valuable assets – your stock.
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