A Complete Guide to Physical Inventory

Have you ever noticed that your stock levels don’t align with what’s recorded in your system? If left unchecked, this mismatch can lead to financial losses and major headaches down the road. Thankfully, physical inventory counts offer a solution.

Not only do they help you get a clear and accurate picture of your inventory, but they can also significantly cut down on inventory carrying costs, which research shows can reach 30-60% of your inventory’s value. By accounting for every item, you’re not just preventing errors—you’re also saving money.

This article will cover everything you need to know about conducting physical inventory counts, including the steps, methods, processes, planning, and benefits involved.

What is Physical Inventory?

Physical inventory involves manually counting and checking the stock of goods in a store or warehouse. This hands-on process ensures that inventory records are correct, uncovers any discrepancies, and supports better inventory management and financial reporting.

A physical inventory begins with tallying up the stock in your store, from the sales floor to the back room. You’ll then match these counts with what’s recorded in your POS system and sort out any differences.

This process covers every product variant, plus raw materials, work-in-progress items, finished goods, packing supplies, and MRO supplies. The aim is to ensure your inventory numbers are spot-on in your POS system, with any gaps measured by your shrinkage rate.

For example, if you count 150 t-shirts but your POS shows 145, your inventory is 96% accurate with a 4% shrinkage rate. Reconciling these discrepancies is crucial for maintaining accurate inventory records.

Benefits of Physical Inventory Count

Conducting regular physical inventory counts is essential for maintaining control over your stock. Below are some key benefits of performing these counts:

1. Maintain inventory accuracy

When your inventory counts are off, whether it’s the total quantity or specific product sizes, your business can experience all sorts of headaches. Regular physical inventory counts are essential because they match up the actual stock you have with what’s recorded in your system.

If there’s a discrepancy, it could mean something’s gone wrong, like inventory loss or missed shipments. Don’t play-play with this—getting it right is crucial!

2. Improve demand forecasting

Accurate inventory checks are key to better demand forecasting. By knowing exactly what’s on your shelves, you can more accurately predict how much of a product you’ll need, how quickly it’ll sell, and when to restock.

This helps ensure you order products based not just on their popularity but also on their profitability. It’s better to plan properly, lah, than to end up with too much or too little stock.

3. Prevent stockouts

Nobody likes to hear, “Sorry, this product is out of stock.” Stockouts can drive customers away, and they’re often the result of poor inventory management. Regular counts, along with tools like reorder points and low stock alerts, help you stay ahead of the game by knowing when to restock before you run out.

Out-of-stock items are the top reason customers leave stores to shop online; 43% of retail associates report customer complaints about out-of-stock as their biggest frustration, and 39% of consumers leave a store without purchasing because of this issue.

4. Increase sell-through rate for struggling inventory

Inventory counts don’t just prevent stockouts—they also help you manage slow-moving inventory items. You can take action by identifying products that aren’t selling as expected, like promoting them more or offering discounts. This helps move inventory faster, ensuring you get a return on your investment and free up space for more in-demand products.

5. Reduce inventory shrinkage

Inventory shrinkage, where your actual stock is less than what’s recorded, is a common issue caused by theft or shoplifting. Doing partial inventory counts regularly can catch these discrepancies early, giving you time to figure out what went wrong and fix it.

Regular checks are crucial because, without them, shrinkage can go unnoticed, leaving you with inaccurate stock levels in your system.

6. Avoid over- or understocking

Not keeping a close eye on your inventory can lead to overstocking or understocking, both of which can hurt your bottom line. For example, as of April 2023, the U.S. Census Bureau reported that the average retail business had $1.39 worth of inventory for every $1 in sales.

Overstocking often leads to markdowns, which can eat into your profits. Balancing your stock levels is essential to avoid these pitfalls and maintain healthy margins. Don’t wait until you kena stock problems, better to stay on top of things!

Types of Physical Inventory

There are several methods to conduct a physical inventory, each with its own advantages and challenges. Here are the main types you can consider:

1. Manual counting

A manual inventory count is exactly what it sounds like. Store associates count each item by hand in the stockroom and on the sales floor, recording the numbers with pen and paper.

While this method is low-cost, it’s time-consuming and highly prone to human error, which is why most stores steer clear of it.

• Advantage: This method is more cost-effective because it doesn’t require any special equipment.
• Disadvantage: However, it is prone to human error, making it less reliable.

2. Electronic counting

An electronic inventory count involves using barcode scanners and a POS system to speed up the process and improve accuracy. As each item is scanned, the SKU’s inventory level is updated electronically.

This method significantly reduces the chances of over- or under-counting and creates a digital record for easy reconciliation against POS data.

• Advantages: Electronic counting lowers the risk of over- or under-counting, leading to more accurate inventory records.
• Disadvantages: Despite its accuracy, this method can still be time-consuming and requires staff to complete.

3. Cycle counting

Cycle counts, or partial inventory counts, focus on counting specific categories of products rather than the entire store’s inventory. This method is perfect for retailers who want to keep accurate records while saving time by breaking the task into smaller, more manageable parts.

Unlike full counts, cycle counting can usually be done during regular business hours without needing to close the store.

• Advantages: Cycle counting can be done during regular work hours and is less time-intensive, making it more convenient.
• Disadvantage: It is not easily scalable for growing businesses with increasing inventory.

4. Full inventory counting

A full inventory count typically takes place at the end of the year, after the holiday season, when stock levels are at their lowest. Retail teams tally up all the inventory in the store, ensuring they start the new year with accurate records that reflect the total cost of goods sold and the retail value of merchandise.

Given the time and effort required, many small retailers limit full counts to once or twice a year, opting for cycle counts in between.

• Advantage: Full inventory counting provides highly accurate inventory numbers, which are essential for preparing balance sheets.
• Disadvantages: This method often requires the store to close temporarily and is labor-intensive

When to Do a Physical Inventory Count

When restocking, it’s smart to conduct a mini-physical inventory count to ensure the total number of items, both new and existing, is accurate. This gives you a solid baseline for future inventory checks.

How often you should do a physical inventory count depends on several factors, such as:

• The number of SKUs in your inventory
• The daily sales volume
• The inventory method you’re using
• Whether you use technology like a POS system or barcode scanners

For instance, if you run a small clothing boutique with 120 SKUs, counting everything might not take long. A monthly full inventory count would be manageable. On the other hand, if you’re a large retailer with thousands of items sold daily, you might need to check stock more frequently.

Regularly counting inventory helps keep financial records accurate, prevents mistakes, and keeps customers happy. If you don’t do these counts often, you might lose money, disappoint customers with out-of-stock items, and have trouble spotting theft or loss.

In fact, 43.8% of firms with inventory-related MWIC (Material Weaknesses in Internal Controls) report inventory impairments compared to 22.3% in control firms

Still, you can speed up the process by focusing on smaller sections of your inventory (this is called a cycle count or partial inventory count).

Besides doing partial counts, it’s a good practice for merchants to perform a complete physical inventory count at least once near the end of the year. This ensures your inventory records are accurate when preparing your balance sheet for tax season.

How to Count Physical Inventory

Counting physical inventory requires careful planning and execution to ensure accuracy. Follow these steps to carry out your inventory count effectively:

1. Schedule and Plan the Count

To ensure a smooth inventory count, it’s crucial to schedule it ahead of time. Set a specific date for your stock check—whether it’s in a week, a month, or quarterly—and notify your retail staff well in advance.

If the count requires closing the store during business hours, inform customers through announcements on your social channels, a banner on your website, and signage at the store. Assign enough employees to complete the count within the allotted time, ideally after the store closes, to avoid disruptions from customers.

2. Prepare and Assign SKUs

Effective inventory counting requires careful planning and organization. Create a list of stock-keeping units (SKUs) that need to be counted and divide them among your staff. For example, one person can handle women’s t-shirts, another men’s shorts, etc.

This division ensures that each associate has a clear list to follow, preventing double-counting. Before the count, tidy up the stockroom and sales floor to give each team member enough space to work efficiently.

3. Restock the Floor

To make the counting process smoother, restock as much inventory as possible on the sales floor before the count begins. Moving inventory from the backroom to the selling floor helps employees organize products better, making them easier to count.

This also reduces the amount of inventory that needs to be counted in the backroom, freeing up space for incoming products.

4. Explain the Process

Ensure that all staff involved in the inventory count understand the process and the importance of accuracy. Provide clear instructions on the type of stock check being conducted and where to record the results.

If you’re using any special technology, such as logistics management software, offer training to ensure everyone is proficient before the count begins. Only allow staff to participate once they have demonstrated the necessary skills.

5. Assign Locations

For stores with large inventories, assigning specific locations or aisles to each employee can streamline the counting process. For instance, a supervisor might assign each employee an aisle to count and have them double-check the adjacent aisle for accuracy.

This method is particularly useful if you want to close off sections of the store one at a time rather than shutting down the entire store.

6. Compile and Review the Count

After the count is complete, it’s essential to compile and review the results to ensure accuracy. Compare counts from different employees, especially if two people counted the same inventory, to confirm consistency.

If there are significant discrepancies, consider a recount or additional employee training. Accurate inventory counts are critical for reordering products and making informed financial decisions.

Issues Companies May Face with Physical Inventory

While physical inventory counts are crucial, they can present several challenges for companies. Here are some common issues that businesses may encounter during the process:

1. Time and Resource Constraints

One of the biggest challenges companies face with physical inventories is the required time and resources. Many businesses find it necessary to shut down parts or even all operations to conduct a thorough inventory. This disruption can lead to poor customer service, as operations are paused during the count.

2. Limited Staff Availability

Not all companies have enough staff to complete a full physical inventory. Smaller businesses, in particular, may struggle with the manpower needed to accurately count all inventory items, making the process even more challenging.

3. Common Discrepancies in Physical Counts

Discrepancies during physical inventory counts often arise due to inaccurate recording by internal or temporary staff. Common issues include:

• Incorrect Recording: Some inventory items may be inaccurately documented or incorrectly classified, leading to mismatches in inventory records.
• New Item Errors: New inventory items might be recorded improperly, further complicating the count’s accuracy.

4. Items to Exclude from Physical Inventory

Regardless of how accurate the physical inventory count is, certain items should be excluded from the count:

• Supplier Receipts: Any supplier receipts that arrived after the predetermined cut-off date should not be included in the count.
• Known Thefts: Items that have been identified as stolen should not be counted in the inventory.
• Uninvoiced Shipments: Any shipments that have departed but do not have accompanying invoices should also be excluded from the physical inventory.

Tips and Best Practices for Physical Inventory Count

The key to a successful inventory count lies in thorough planning. Implementing a clear, detailed policy with step-by-step instructions can minimize uncertainties and make the physical inventory process smoother and more efficient.

Here are some tips to boost your team’s accuracy during the count:

• Leverage Technology: Equip your staff with scanners or other stock-counting tools to enhance precision and speed.
• Choose Attentive Counters: Select team members who are detail-oriented and focused to ensure accurate counts.
• Address Issues Quickly: If discrepancies arise, tackle them immediately to prevent errors from snowballing.
• Practice with a Mock Count: Conduct a practice run during the planning phase to iron out any potential issues before the actual count.
• Hide Cost Information: To avoid distractions and maintain focus, ensure that item costs aren’t displayed during the count.
• Pause Operations: To complete the physical inventory, stop all other business activities to allow your team to concentrate fully on the count.
• Limit Staff Presence: Only essential staff should be on-site during the count to reduce distractions and ensure everyone is focused on the task.
• Secure the Inventory Area: On the count day, ensure the stock area is secure and organized to streamline the process.
• Use Inventory Software: Incorporate inventory management software to keep everything organized and help track progress in real-time.

With these strategies in place, your inventory count will be more accurate, efficient, and less stressful for everyone involved.

How to Streamline Physical Inventory Counts With HashMicro

Counting inventory is just part of doing business, but it doesn’t have to be a headache. Using an inventory management system like HashMicro’s helps ensure you’ve got the right stock in the right places to meet customer demand without stress.

HashMicro’s Inventory Count feature gives you more control over your assets. You can categorize inventory based on transaction volume or value and make regular counts to keep everything accurate.  Additionally, the system is integrated with Barcode & QR Codes and RFID technology, so companies have an easier time counting their inventory accurately.

With HashMicro, you get accurate inventory levels, automated prompts for what needs counting, and improved quality assurance—all leading to happier customers. Plus, as you cycle count, discrepancies get smaller and smaller, making reconciliation a breeze.

Want to see how it works? Give HashMicro a try with a free demo! You’ll see just how much easier inventory management can be.

FAQ About Physical Inventory

• How to calculate physical inventory?

  1. Assign maps, inventory printouts, and equipment to staff.
  2. Staff counts the designated inventory.
  3. Staff fills out spreadsheets or count tags with the inventory data.
  4. Staff returns the completed spreadsheets or count tags to managers.
  5. Managers enter the collected data into the inventory system.

• When is a physical inventory usually taken?

  Physical inventories are typically conducted when there is minimal activity in terms of goods being sold or received, and often at the close of a company’s fiscal year.

• What is the key to a good physical inventory?

  Before starting the physical inventory count, it’s important to plan the warehouse layout, designating specific bin or slot locations to specific count teams. Remove unsellable or damaged items beforehand and clear as much return-to-vendor (RTV) merchandise as possible to avoid including it in the count.

• Who is responsible for inventory count?

  The inventory manager plays a crucial role in overseeing inventory control, which is essential for store operations. However, inventory management is a team effort, involving multiple people, whether in small stores with a few staff members or in larger organizations with many employees.