Retailers need to do a physical inventory count once a year for tax purposes or just before a specific sales season. However, pushing all your inventory control procedures into a single event requires much time and resources. On the other hand, regular inventory checks can keep your stock information updated and reduce inventory carrying costs. Therefore, the benefits you get far outweigh the efforts involved. The article will explain the concept and how you can improve your physical inventory counting procedures.
What is a physical inventory count?
Physical inventory count is the actual quantity of materials and products a business owns. The goal is taking a physical count of inventory and making sure that the inventory data you have on paper matches the actual inventory in the store. According to the Generally Accepted Accounting Principles (GAAP) and Internal Revenue Service (IRS) rules, retailers who keep inventory must conduct an inventory count at least once a year.
However, annual physical counting is highly time-consuming, especially for large retailers with many products. Moreover, regular inventory checks help your inventory forecasting more accurately to reduce shortages and wasted warehouse space. So, you can conduct a physical inventory count with a smaller number of samples several times a year. Remember, you’ll still need a specific amount of inventory to meet tax regulations or financial accounting rules.
Physical inventory counting process
The physical inventory counting process involves an employee or a team going through a retailer’s sales floor and inventory room and counting each item. They then record the inventory movement data manually, using pen and paper, or electronically using a mobile device. Here are the 11 steps of standard physical inventory counting procedures to ensure a successful inventory process:
- Step 1: Set counting date and notify all employees
- Step 2: Determine who will do the counting
- Step 3: Prepare the necessary tools
- Step 4: Break down the counting process and make a physical inventory count checklist
- Step 5: Create a warehouse map to optimize distance to move back and forth
- Step 6: Divide counters by specific area
- Step 7: Count as many pieces as possible before the scheduled counting date and mark the ones that have been counted to prevent double-counting
- Step 8: Send out all the items you need to ship before the actual count begins and take no additional inventory in the process
- Step 9: Monitor while your employees are counting
- Step 10: Make a report and review the difference
- Step 11: Evaluate and document the process
So, if you’re a retailer with a large inventory, this option will take a long time and freeze your inventory, making it impossible for you to carry out routine operations. However, you can implement inventory management systems, and its automation feature can simplify your tracking and counting process.
4 types of physical inventory counts
There are 4 most common types of physical inventory counts: inventory sampling, continuous inventory, cycle counting, and periodic physical inventory (or physical inventory for short). You can choose one technique depending on your retail inventory and counter resources. To make it easier for you to decide, below is a comparison table that summarizes the pros and cons of these inventory counting methods.
Methods | Inventory sampling | Continuous inventory | Cycle counting | Periodic physical inventory |
Counting definition | Randomly count and record any differences from the balance sheet | Count inventory continuously throughout the year but make sure every product is stocked at least once a year. For example, count some products in March and some customer products in September. | Count random or rotating parts of inventory at any given time | Count all inventory in warehouses at once |
Pros | Flexible and less time consuming | Low cost and can be proactively planned | Less time consuming to limit store closures during the counting period | The most accurate inventory counting methods to generate annual financial documents |
Cons | May not reflect inventory status | Need to allocate time and resources properly | Need to be done regularly with consistent counting methods | Take the most time and effort |
Physical count vs cycle count
Among the 4 inventory counting methods above, there are 2 preferable ones that retailers use the most today: periodic physical inventory and cycle count. The fundamental difference between them is the physical counts of inventory. In the cycle count process, you count a small set of inventory at a specific location on a specific date, instead of counting the entire inventory like in the periodic physical count process.
So, if you’re looking for a more cost-effective solution, the cycle count is more beneficial because it causes less disruption, is less complicated, and takes less time. In addition, it allows you to evaluate each product segment. However, if you’re a small retailer with little inventory, you can choose a physical inventory count and start the new year with precise data.
5 inventory counting tips on how to do an inventory count
To make your physical inventory counting procedures easier, here are our recommended 5 best practices. Besides general tips, we’ll cover the health and safety of counting inventory during COVID-19.
Choose the suitable inventory counting methods
Ideally, retailers do physical inventory counts as often as possible. You can do a cycle count daily (usually before the store opens) or weekly. For example, if you have a clothing store, you can choose a niche or a specific brand. Then you count them by the number of styles and sizes and compare them with the numbers stored on the computer. From there, you don’t have to count the entire inventory.
Schedule in advance and inform customers
Explore solution: Track & manage items in real time for better inventory visibility
As a retail store owner, you’ll want to minimize store downtime during the physical inventory counting process. So try to schedule it after business hours. But if it’s not possible and you need to close the store for a few hours, be sure to notify your customers. For example, place a sign outside your store and at the checkout counter detailing the date and time you’ll be closing and why. Also, make sure your employees can participate at the scheduled time.
Select attentive counters
It would help if you formed an inventory counting team, which combines experienced employees (familiar with the procedures and your store location) and newbies (who can provide fresh perspectives to avoid missing minor details). However, you need to train new employees to track inventory precisely the same way as previous workers to ensure consistent inventory counting methods.
Alternatively, you can hire third-party counters if you don’t have the expertise or in-house resources to do the counting yourself. They’ll ensure standard processes and provide in-depth suggestions on improving your existing inventory management processes.
Apply inventory management software
Physical inventory count consumes a lot of time and labor. Thus, an automated inventory tool can significantly cut down on human error and reduce inventory count training time. These modern solutions often offer dedicated inventory counting features. For example, it allows you to use barcode scanners with your device’s camera or SKU lookups to speed up inventory counts and minimize human error. Additionally, inventory software provides data such as when a product was manufactured, how long it has been on the shelf, and its physical location in the warehouse. From there, the reporting and analytics feature can suggest what you should do to improve your business.
Comply with safety regulations during COVID-19
To practice safety measures, you need to keep a safe physical distance of at least 6 feet by designating different areas between groups when taking a physical count of inventory. Or you can schedule counting in shifts, so your employees don’t have to go to the store all at once.
In addition, limit touching and ensure one device per person when counting products. Instead of using pen and paper, you should use inventory management software that all your employees can access from their devices and scan products.
Related questions
How do you calculate physical inventory?
To calculate physical inventory, you need a physical inventory count presenting each inventory unit’s volume, weight, quantity, and other measurements. Then, you can aggregate these figures to ensure that all your assets and receivables are in balance. In addition, one efficiency metric to measure inventory efficiency is the Inventory Turnover Ratio:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
In which, the average rate of bestsellers is usually around 16.5 times per year.
As you might be interested: What is a good inventory turnover ratio for retail?
What does physical inventory consist of?
Physical inventory consists of all products in your warehouse or retail store. It includes raw materials, in-process, and finished goods. These inventory counting categories combine goods you use to produce inventory and which items are ready for sale.
How often do you do a physical stock count?
When and how often you should do a physical stock count is up to you. Some large retailers do it once a year, while small shops do it even more often. For example, if you have perishable items, you may conduct a daily inventory check to avoid damage. On the contrary, fashion retailers can count their inventory at the end of the season. So, depending on the volume and characteristics of your stock, you can do it every two months or every three. From there, you can maintain inventory accuracy, detect shrinkage causes early, and ensure the right stock is in the right place and at the right time.
Final thoughts
While physical inventory count is time-consuming and cumbersome, it’s essential to the success of any retailer. You can consider equipping a modern inventory management system as a long-term investment. It can ease your physical inventory counting process with automatic counting reminders, eliminate manual tasks, provide optimal inventory levels, and better inventory forecasting. From there, you can improve quality assurance and higher customer satisfaction rates.
Wondering if you need an inventory solution for your Magento business? Let’s schedule a quick talk with Magestore to see how we can help you improve inventory count and management.
