You’ve got the warehouse. You’ve got the inventory. You’ve got the staff. The time has come to do your first physical inventory count. But where do you start? And what’s a physical inventory count anyway? If you’re just starting out in the business of inventory management, you’ve come to the right place to learn about the basics of taking a physical count of inventory. This guide will discuss what to do before, after, and during physical inventory counts. Don’t worry - you’re in good hands.
What is Physical Inventory?
Before you begin taking a physical inventory count, let’s first discuss the physical inventory definition.
Physical inventory is the weight, measurement, volume and count of items in a company’s inventory. Physical inventory counts is the process of physically counting items owned by a company. Now that we know how those terms work in conjunction, let’s move on to why they are important.
What's the Purpose?
I’ll be completely honest with you - performing physical inventory counts is not the most exciting job in the world. In fact, it can be quite tedious and time consuming, depending on the size of your inventory and the method of counting. But it’s very important to the structure and function of a company. Physical counts are important to track what inventory you have written on paper compared to what inventory you actually have in your warehouse or storage facility.
Businesses take a physical count of inventory because it accounts for discrepancies, like lost or stolen inventory, inventory that needs to be purchased, and inventory that is undersold or oversold. Some companies perform physical counts at the end of the month, quarter or year to replicate numbers at the end of a reporting period. Others think it’s best to perform them during the last weekend of January or at the end of July when SKUs are potentially at their lowest. Altogether it’s in general a necessary process to perform to keep the foundation of your business intact.
Remember: the amount of physical inventory counts performed is based on the size of your inventory and preference. It’s ultimately up to you.
Taking a Physical Count of Inventory
There’s a few ways to perform physical inventory counts. Beginners will typically choose the manual route using pen and paper or an Excel spreadsheet, and transition into using inventory software to perform physical counts. Either way you will get the job done. Let’s break down these options.
PHYSICAL COUNTS WITHOUT SOFTWARE
Remember when I said physical counts can be tedious and time-consuming? Performing physical counts without software is the process I was referring to. Companies without inventory software tend to use either an inventory tracking spreadsheet or an inventory count sheet. It’s a pretty cut and dry process.
- Staff counts every single item of inventory on an inventory count sheet using pen and paper. Divide the data into three categories: SKU, location, quantity.
- When using an inventory tracking spreadsheet, the staff counts every single item of inventory and inputs that data into an Excel spreadsheet.
- Divide the inventory tracking spreadsheet into three categories: SKU, location, quantity. If you have barcodes, scan those and put into the SKU column.
- This process of counting every space can be performed as many times as you want based on the size of your inventory.
PHYSICAL COUNTS WITH INVENTORY SOFTWARE
Once a company has grown past the capabilities of using pen and paper to track physical inventory counts, it’s time to look into inventory software. This doesn’t necessarily mean it’s okay to throw out the Excel spreadsheets.
In fact, some softwares pull inventory counts from Excel spreadsheets via uploads. Once the data is uploaded and synced, processes are automatic. Gone are the days of manual data entry and tally counts. Users can do a quick search within the software to find the location of items based on barcode labels or SKU numbers.
SkuVault, for example, recommends that clients who use Excel initially upload their quantities that way first, and then let SkuVault use the audit feature after to count item locations. Auditing locations allows user to recount items in a location by replacing the previous items with newly scanned items and quantities. From this point on physical inventory counts are automatic. Pretty cool, huh?
Some users have concerns over potential sales between the time of initial counting and the finished process. Although a valid concern, with SkuVault, users are recommended to turn on the ‘order sync’ to keep track of what is being sold in-between the start and finish of physical inventory counts. It also helps users track what was ordered which creates pending quantities in SkuVault. This creates an equilibrium for the time in-between, which could take anywhere from 2-3 weeks to a do a complete physical inventory count.
General Tips to Remember
Any process is performed best when plenty of preparation time is set in place. This is an age old tale. Due to the possible magnitude of a physical inventory count, some things need to be planned ahead of time. Here’s a few things to consider:
- Make a map of your storage facility/warehouse. Using a visual aide makes the count seem less daunting and provides a navigation route to specific areas that may need more attention than others, like a damaged products area.
- Purchase necessary supplies. If you're not printing barcode labels from an inventory software, consider using inventory tags to mark which items are counted and how many times they have been counted. If you're using pen and paper, purchase enough backup pens, markers, or pencils to last the length of counting time. Buying a few clipboards to make writing easier isn't a bad idea either. In certain areas step stools, ladders, masks, and/or plastic gloves may be appropriate. Better to be safe than sorry!
- Plan a counting date in advance. Since physical inventory counts can take up to an entire working day to complete, you don’t want to pick a day that’s typically busy. Choose a day you can predict with confidence that will be relatively calm, or even close the store/business for the day. In any case, let your staff/customers know in advance so they have time to prepare. Also let suppliers know you will not be accepting deliveries during count days.
- Decide who will be counting. Again, give your staff notice on who will be counting so they can adjust their schedule. Physical inventory counters should be in pairs- no more or no less. One person is in charge of counting and the other to record data. It’s also advisable to assign a supervisor to monitor the counts for accuracy. If certain areas are not counted correctly they need to be re-counted.
- Review counting process with counters. Go over what data counters should be recording and which areas they should cover or not cover.
- Identify which items to include or not include in the count. If possible, handle and record inventory before the count begins, such as returns and receipts.There should not be any movement during a physical inventory count. If you receive a delivery during a count set it aside and mark it for later.
- Tidy up the warehouse/storage facility. Counting will be made much easier if warehouse or storage facility areas are free and clean of debris. Make sure there are no possible hazardous areas like wet floors or inventory hanging from shelves. Don’t make the process any more stressful for counters than it needs to be.
- Organize inventory beforehand. Arrange items before the count so they can be easily counted. Make sure inventory is clearly labeled to be counted or not, and make sure each item has a SKU or barcode.
In the case of special or segregated areas in the warehouse, the following are examples of areas that should be counted in the physical inventory counts:
- Pending shipments that have been packed, but not shipped
- Allocated stock for production
- Receipts received from suppliers before the cut-off date of a count
- Inventory left on the warehouse floor from production
Some areas that should not be counted and are considered discrepancies include:
- Receipts from suppliers after the cut-off date of a count
- Receipts from suppliers that downplays accounts payable
- Shipments sent off without invoices
After the Physical Inventory is Completed
Okay, you’ve read a lot of information by now. Take a deep breath and exhale. If you’ve come to this point and are thinking, “I’m still not sure physical inventory counts are right for my business,” you’re in luck.
The alternative, or supplement, to taking a physical count of inventory is to conduct cycle counts.
Cycle counts is an inventory auditing procedure where a smaller subset of inventory is counted continuously on a rotating basis. Unlike physical counts that cause a total shutdown of production, cycle counts can be performed daily with as little or as much quantity per count desired. So, instead of counting your entire inventory at once over the period of one to several days or weeks, you could count individual sections of inventory a little each day. Inventory software has cycle count capabilities making inventory audits automatic and free of human error.
[Discover the best practices for performing cycle counts]
Additional Auditing Methods
Periodic inventory is another method of inventory auditing where a physical count of inventory is performed at certain intervals for financial reporting purposes under the asset section of a balance sheet.
Perpetual inventory is another form of inventory accounting that records the sale or purchase of inventory immediately via point-of-sale systems and/or enterprise asset management software. Periodic inventory is great for smaller businesses that don’t need electronic tracking, whereas perpetual inventory does not need to be updated manually and is all electronic.
Follow-up on this blog in the near future as we will be discussing periodic inventory and perpetual inventory in greater depth.
Physical inventory counts are essential for the organization and overall success of a business. If you cannot confidently say how much and what quantity you have in-house, the steps following will crumble. But that’s not going to happen to you, the reader of this physical inventory counts article, because you now have all the tools necessary to conduct your first count. If you have any comments or questions please feel free to ask below or contact us on Facebook, LinkedIn, or Twitter.