Are You Ready for Your Year-end Inventory Count?

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It’s one of the most dreaded days of the year for many of you…physical inventory day.  This can be a frustrating and time-consuming process with numerous obstacles, though with the proper planning you can make the physical inventory process run smooth and efficient.

Inventory preparation – There is a lot you can do ahead of time to prepare for the big day.  Inventory areas should be clean and organized.  If they are not, the physical inventory will take much more time and be much more aggravating than it needs to be.  You can also perform pre-counts on certain areas.  If you have sections of inventory that don’t turn very often or are reserve stock, you can count and tag them ahead of time.  Further, physically segregate any inventory that should not be included as part of the physical inventory process, and label as such.

Inventory instructions – Be sure that your company has written instructions for the physical inventory count.  These instructions should be prepared by management, distributed in advance to employees involved in the count, and reviewed with them in advance.  Written instructions will help ensure that everyone follows the designed plan and procedures for completing the physical inventory.  Further, maps should be used along with the instructions to assign areas of responsibility.

Count sheets/tags– Whether using pre-generated count sheets, blank (fill-in) count sheets, or tags, management should designate a responsible employee to monitor and control the distribution, use, and return of the count sheets or tags.  Unused, voided, or mutilated count sheets or tags should be accounted for.

Inventory movement – Inventory movement should be kept to a minimum or, better yet, halted during the physical inventory.  Some of you cannot or do not want to shut down for the entire physical inventory process.  While we recommend that the company is closed or shut down for the entire physical inventory, if the company is not, the company’s instructions should describe how inventory movement is to be sufficiently documented and who will monitor and reconcile the inventory movement that occurs.   Failure to control and account for inventory movement could lead to nightmares when reconciling physical inventory counts to the inventory management system.

Counting procedures – It is usually best to have teams of two counting together, with a supervisor assigned to each area.  One person counts the items, and the other records the count and other related information.  The completed count sheets should contain enough information for someone other than the counters to find and re-count the inventory, if needed.  Each member of the count team should sign the count sheet or tags as counter or recorder.  This is where the accountability comes in.  Many business owners feel like this makes them appear distrustful of the employees, but it doesn’t.  This will show that someone is taking responsibility for the count.  It also helps resolve questions that may arise during the count and determine if other areas should be recounted, if discrepancies are noted during initial recounts. 

Recounts – The designated supervisors for each inventory area should perform recounts on a sample basis.  This will help alleviate any errors that might be noted by the outside auditor, if your company undergoes a year-end financial audit, but more importantly will assess the accuracy and diligence of the count team.

Damaged/Obsolete inventory – Damaged or obsolete inventory should be segregated, if possible, before the physical inventory.  Regardless, count teams should be reminded to keep their eyes open during the counts for damaged or obsolete inventory.  If there is an inch of dust on a particular item or a unit is damaged, this information should be recorded for later analysis. 

There is always a lot going on leading up to and during the physical inventory count.  By considering the above, you should be able get your inventory recorded as accurately as possible and, hopefully, with less frustration.  If you don’t care about accuracy, why are you taking the time to count the inventory in the first place?

Bobby Mikkelsen