The process of counting your inventory is one of those dreaded, yet essential, business processes that most owners put off until the accountant demands it. The physical count process is disruptive to business, stresses the staff, and usually points out deficiencies that most owners/managers would rather not know about. I would argue that a well-executed and timely physical count can provide valuable information that can be used to improve your business.
Following are eight tips that will streamline the process of counting your inventory and help you get good value for the effort.
1. Replenish your shelves and get stock out of the back room
Most Physical Inventories get bogged down trying to find the inventory. Set up a “bin” system for your shelves and stock room and make sure your inventory is properly put away. If possible, before you begin your counts restock the shelves on the showroom floor to eliminate having to count in multiple locations. This step will significantly reduce errors and frustration.
2. Meet with Staff to explain the process and the importance of accuracy
The “counters” can make or break a physical count. Think about the people that will be involved and make sure you get the right person assigned to the appropriate inventory. Put your best detail oriented people on the small, tedious items and leave the big, bulky inventory for your ADHD staff members! Schedule a meeting before you begin the counting process and make sure everyone understands their responsibility. Emphasize how important it is to get an accurate count and make sure everyone involved is willing and able to do the job correctly.
3. Assign each employee a location and provide count sheets with the inventory that is expected to be in that area
Avoid confusion and make specific location/area assignments. Make sure the person/people assigned to a location or area are clear on what they will be counting. Give them a list of the items that should be found in that area.
4. Include the item number, a description, and the price on the count sheet
Do NOT include the quantity expected for each item on the count sheet. Create count sheets that are sorted by location/area. The sheet should include critical information that will allow the people performing the counts to quickly identify the items. The count sheet should include the Item Number, the Description, the Bin Location, and the Price. By including the price, your staff can double check to make sure the bin tags and price tags are accurate. NEVER include the expected quantity on the count sheets. This is a sure fire way to get inaccurate results. Too many people will take the easy way out and enter the quantity they think you want them to count as opposed to what they actually counted (if they even bother to count). Instruct the team to mark any items that need label corrections. A colored flag or marker attached to the bin as well as a mark on the count sheet will allow you to go back and correct labels after the count is complete.
5. A manager should spot check several inventory items for accuracy
I’m certain this isn’t true of YOUR staff, but I have found that some members of my physical count team have not always been as accurate as they should be. It is a good practice to have someone of authority go through each area and perform several spot checks for accuracy. Don’t wait until the counts are complete — do it early in the process and make sure the team can see that you’re checking. Positive reinforcement is always the best way to keep people motivated, so when your spot checks are accurate, make a big deal about it and if you find an inaccurate check, quietly let the person know they need to be more careful.
6. Complete the count as quickly as possible
Including comparing the counts against your computerized inventory system. Completing the physical count is just one step in the entire inventory reconciliation process. Next you need to reconcile the physical count against the perpetual inventory system which is part of your ERP/Rental system (you do have a computer system that includes perpetual inventory, don’t you?). As the count sheets are coming in from your crews, immediately follow the software publisher’s recommendations to perform the reconciliation. Waiting until the entire count is complete or until the accounting department has time to get their part done is a mistake. If you wait, you’ll have to take into account sales/receipts that have occurred since the count was complete, increasing the chance of error.
Some ERP/Rental Management systems will include the ability to FREEZE inventory at a particular point in time. If you have this available, you will be able to take a snapshot of your inventory at a specific point in time, perform your physical counts, and then go back to processing your normal business of selling, receiving, and renting. When you perform the reconciliation, you will be reconciling the physical against the “snap shot.” This significantly improves your ability to complete an accurate physical inventory with minimal disruption to your business.
7. When discrepancies are found, do the research to determine why and work to fix the problem(s) in the future
It is inevitable that you will find discrepancies between your physical count and the perpetual inventory that exists in your computer software. As you review the differences, you may notice a trend that will help you improve your day to day processes. For example, you may discover that your receiving department is not putting away items in their correct location, or perhaps parts are being used by your service department and not included on a repair ticket. Use this process to discover the holes in your business processes and find a way to plug them going forward.
8. Consider Cycle Counting in the future
Most business owners/managers put off physical counts because it is so disruptive to the day-to-day business. Rather than doing an annual complete count, you may want to consider performing cycle counts throughout the year. This would allow you to spot check your inventory continuously and find leaks in your inventory before they become a flood. Some ERP/Rental systems include the ability to select subsets of your inventory for counting. This subset could be by bin location, by product line, by item type, etc. I have a customer that counts his high dollar inventory EVERY DAY because he has had problems in the past with inventory disappearing out the back door. This daily inventory for specific items completely eliminated the losses. The rest of his inventory is counted in small batches every month so at the end of each year, he has counted every item in his inventory at least once.
If you dread performing a physical inventory for your company because of the disruption in business, the complaints from your staff, or because of the late nights and/or weekends spent completing the counts and reconciliations, I hope you will use the advice above to streamline and improve the process and reduce the natural aversion to counting inventory.