How to Perform a Physical Inventory Count

Inventory is a key asset in financial statements and it’s important to know how much of it you have. This post examines why a physical inventory count is important and how to conduct one efficiently.

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Inventory is a key asset in your financial statements that can be used as collateral for bank loans but can also be misappropriated for fraud/theft. Hence, a physical inventory count is really really important! 

What is an Inventory Count?

An inventory count is a literal count of all the products a business stocks. The process requires coordination and precision and includes things like separating and counting items and then recording the results. Retail, Wholesale, and Trade companies usually conduct a physical count once a year for tax and accounting purposes.

If a difference is found between the count and your books or software, updates are made to reflect the results of the physical count. Even if you run a service-oriented company, an inventory of office equipment and materials is necessary to effectively run your business.  

Possible reasons for differences between the count and the records include:

  • Unrecorded markdowns
  • Wrong classification of sale items
  • Incorrect recording of items received (or no recording at all)

Benefits of “The Count”

  • Theft Management – Inconsistencies can be due to a thieving customer or employee.
  • Sales Forecasting – The results of the count can help create an accurate business budget.
  • Customer Service – Accurate stock levels help fulfill orders on time and accurately.

An inaccurate count can result in negative consequences for your business. If the physical count is exaggerated, you will report inflated gross and net profits and have to pay more tax than necessary. Or buying decisions will be based on wrong information. This may result in the unnecessary purchase of a type of item eventually becoming dead stock.

The 2 most popular ways to do a count are:

  • Manual completion – use count sheets and pencils to record inventory numbers manually.
  • Electronic counting – Tech like QR codes, mobile, and cloud software use barcode scanning to send information from a smartphone to the cloud.

How to perform an effective Inventory Count without Software

  1. Plan Ahead – Schedule a time when sales are slow and inventory levels are down. 
  2. Pick and train the counters, let the warehouses and other storage locations know what is happening and when, and buy materials such as count tags.
  3. Replenish shelves with merchandise from the stockroom. Try to clear as much inventory from the back room as possible.
  4. Using pen and paper, sketch where every wall, display, rack and shelf is. Talk to staff about store layout, how the process works, and divide them into count teams.
  5. Each count team should have two people. After the first person counts, the second person completes the count tag with the following information:
    1. Location
    2. Description
    3. Serial number
    4. Quantity
    5. Unit of measure
  6. Put clear labels on shelves and boxes and clearly categorize items. A structured system of items will make the counting process quicker and more accurate. 
  7. After the counting is completed, you need to check your items again and confirm the tags’ accuracy. 
  8. Tag information needs to be entered and reports need to be generated and analyzed to confirm that the warehouse data matches the one accounting has.

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.

Regardless of whether you use manual or electronic tools, stock-taking by physically counting your inventory is a vital aspect of running a business. It is basically you protecting one of your most valuable assets – your stock. So, please take heed and start counting!

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