Taking a physical inventory isn’t on most retailers’ “things I love most about my job” list. Counting and reconciling stock amounts is a significant – and often daunting – task. But it’s an essential component of effective inventory management, and there are proven ways you can make taking a physical inventory less painful. Read on.
Why physical inventory matters
Physical inventory is the process of counting and reconciling your store’s inventory to ensure the inventory recorded on the company’s financial accounting and tax records aligns with the physical inventory that’s present in-store.
Even with all the digital efficiencies that simplify inventory management and make the data more accessible, nothing can replace taking regular physical counts of what’s on your store shelves, in your stockroom, or at your warehouse. The reality is inventory errors, overbuying, and buying the wrong products cost U.S. retailers an estimated $300 billion in revenues each year. To minimize your company’s share of this total, establishing a reliable inventory management process is a must.
The good news is an integrated point of sale (POS) system can help you optimize digital, automation, and reporting options so that you can spend significantly less time taking physical inventory. Leverage your POS system and apply these five best practices to improve your physical inventory process.
1. Determine the frequency.
Most retailers undertake a physical inventory at least annually. But, depending on the size of your business, the type of merchandise you carry, or concerns with discrepancies between your inventory reports and physical counts in the past, taking a physical inventory quarterly or even monthly may be appropriate.
As an alternative to shutting down the business to conduct a full inventory, many retailers take a spot inventory – or cycle count – approach. Instead of inventorying everything all at once, spot inventory enables you to break the task down by conducting portions of the inventory on an ongoing, rotating basis. For example, you could take spot inventory on different sections of the store or by product category on a monthly basis. If you elect to take this ongoing approach, make sure that the entire inventory is physically counted at least once per year.
2. Prep and plan.
No matter what type of business you have, taking a physical inventory is a significant undertaking. Preparation and planning are crucial to ensure you’re able to complete the inventory in the time you’ve allotted, and the counts are as accurate as possible.
- Organizing your stockrooms and warehouses ahead of time. A pre-inventory clean-up is essential to ensure items are properly labeled, like items are stored together, and everything gets counted.
- Identifying what’s in limbo. There will always be pending product orders and returned and damaged items. By determining what’s outstanding in advance, you can minimize confusion when it’s time to reconcile your on-hand reports with the physical counts.
- Ensuring that all items are tagged appropriately. By checking tags and UPC coding throughout your store and stockroom prior to conducting the inventory, you can greatly enhance the physical inventory’s efficiency.
- Mapping out your store and a plan for how the physical inventory will flow, such as where to start and how you’ll move throughout the store. This helps to ensure areas don’t get missed or double-counted.
- Choosing your counters. Decide which employees should be involved. Ideally, you’ll want to mix veteran employees who know your stock well with newer employees who can serve as fresh eyes on the process.
- Creating an audit process. To increase the accuracy of your inventory, plan to audit select sections by having multiple people do the counting, and check each other’s work.
Related: Optimize Your Inventory: Debunking the Myths about Inventory Management
3. Take the count.
You have options on how you tackle the actual physical inventory. Check into what’s possible with your POS system, which should offer you ways to leverage your existing data and technology to streamline the counting process, increase the accuracy, and shorten the time it takes. For example, you could elect to use a handheld device to enter items numbers and counts or scan barcodes. You should also have the option to enter counts into an entry screen within your POS system or import data compiled via spreadsheet reports.
As you conduct the inventory, remember you need to count every item on hand, including committed items like layaways or receiving logs. Your POS system should automatically recognize these types of items as on hand but not available.
Once the physical inventory count is complete, you can open back up for business as you begin the task of reconciling your physical inventory with your stock records. Your objective during this phase is to identify the discrepancies and investigate the causes. Expect discrepancies – physical inventory counts are rarely the exact same as your reporting.
Discrepancies can be caused by human error, missing paperwork, fraud, theft, or damaged items. Do some digging to determine what’s behind the differences identified by the physical inventory. Your POS system’s reporting capabilities will be a key tool in helping you compare actual counts and variances. Your POS should also alert you to unidentified items found only during the physical inventory and missing items shown in your inventory records but not counted during the physical inventory.
Related: What Your Inventory Management Says About the Health of Your Retail Business
5. Analyze and apply.
Understanding your inventory enables you to make data-driven decisions about what to order, what’s selling, and what’s not. It also gives you important insight into shrinkage, which is the difference between the stock amounts you’re showing on paper and what’s physically on hand.
Shrinkage is usually expressed as a percentage, calculated through the following formula: Recorded Inventory Value – Actual Inventory Value, divided by Sales and then multiplied by 100. According to the National Retail Federation, the average inventory shrinkage is 1.62 percent of total sales. While shrinkage varies slightly by industry, if your shrinkage percentage is at or above the average, you should take additional actions to understand and address the causes, such as improving stock intake processes or closing security gaps.
POSIM is a point-of-sale and inventory management system that can help you enhance your inventory processes and turn your data into insights that increase efficiencies and help grow your business. For more inventory insights, check out the replay of our recent Easy Inventory webinar, and contact us for a complimentary demo today.