Physical Inventory Counting: Process, Its Importance, and Tips

physical inventory counting process, importance and tips

Maintaining accurate inventory data is crucial for any successful business. Whatever the size or nature of your operations, conducting a physical inventory of your items is a must.

If you don’t know about the most efficient way to proceed with your physical inventory count or want to improve your process, you’ve come to the right place. In this guide, we cover everything related to physical inventory and help you manage it better.


What Is a Physical Inventory?

Physical inventory is the accurate count of all items a business has in stock. It is also referred to as the inventory on hand—it is used to confirm whether the data from inventory systems match the actual stock.

If any discrepancies are found, they are addressed and adjusted in the inventory system.

A physical inventory count is typically scheduled at the end of the reporting period before the business compiles its annual financial reports. It can be conducted for any type of product, from raw materials and works-in-progress (WIP) to packing materials.

Here’s an example:

A clothing brand may decide to conduct a physical inventory of its t-shirts. They’ll first look at the recorded stock in the system. Then, they’ll perform a physical inventory to count actual t-shirts on hand.

If they find their inventory has missing or damaged items, they can report the same and make changes to the system’s data. They will also address the shrinkage and its causes.

This process is standard for businesses with small and medium-sized inventories. However, those with tens of thousands of items will find perpetual inventory to be more suitable.

How Is Perpetual Inventory Different From Physical Inventory?

Perpetual inventory is a continuous method that involves tracking and recording items as they enter and exit the store. It is the best option for companies with very large inventories where it may not be possible to freeze operations and conduct a physical inventory.

Physical inventories may still be conducted, but they are less frequent.

Perpetual inventory isn’t scheduled like physical inventory, but rather, it is automated using tools like point-of-sale (POS) systems.


Importance of Physical Inventory Count

Doing a physical inventory at least once a year is essential, even if you already have an automated system in place.

Here are important reasons to do so:

Improve Inventory Management

When you maintain accurate inventory data, you can better manage inventory tasks. Data helps you determine what items to order, which ones to discontinue, when to stock certain products, and which orders to prioritize.

Improve Customer Satisfaction

A well-managed inventory means you will always have the right amount of items in stock. And with data regarding shrinkage, you can quickly reorder when you’re running. Both will help ensure that you only deliver top-notch customer service.

Prevent Losses

Physical inventory will give you more insight into problem areas and issues like mishandling, theft, and other reasons for shrinkage. You can then address gaps in operations to ensure they never happen again.

What’s more, your team will be able to identify obsolete inventory. They can make sure to merchandise the items for a quick sale to avoid further losses.

Improve Demand Forecasting and Budgeting

By maintaining accurate inventory records, companies can make better forecasts to prevent overstocking or stockouts and further boost sales. This can help teams plan the following year’s budget and sales strategies to ensure maximum ROI.

Stay Compliant

A physical inventory provides an accurate record of items in stock. This is crucial for companies to comply with regulations covering food or pharmaceutical products.


Steps for Conducting a Physical Inventory Count

Conducting a physical inventory count requires a lot of planning, preparation, and work. It also needs extensive resources.

Here’s how to do your physical inventory right in six steps:

1. Plan and Schedule

Plan the physical inventory count thoroughly and prepare a written strategy with instructions for everyone to follow.

Make sure to include the following in your planning and scheduling:

  • Date and time of the inventory
  • Number of employees needed for counting
  • Step-by-step process to follow
  • Announcements to inform customers, partners, and employees

2. Prepare an Inventory List

Get a list of items or stock keeping units (SKUs) that you’ll be counting. If you use the kitting inventory technique, you may want to clarify whether you’ll count the “kits” or the products.

Once you’ve got a list, divide the list items/ SKUs among your team. A detailed list should help you schedule enough time for the inventory count.

3. Select and Train Staff

The next step is choosing detail-oriented staff members to perform the physical inventory. Your team should have no direct stake in the success of the inventory count.

After assembling your team, you should share all the details of the process and procedures they need to follow.

4. Prepare Space for Inventory Count

You may need to clear space for the inventory process, depending on the type of items you’re counting. Being thoroughly prepared for inventory will be crucial to your success—make sure you have everything you need well in advance.

5. Halt Operations

The next step is to freeze activities in the storage area. You may also need to notify staff, partners, and storage locations about the inventory schedule. This prevents obstructions or issues while the counting is underway.

6. Start Taking Stock

You’re now ready to take physical inventory. Double-check your prepared list and records and note issues that may come up.

You can also use the data collected to calculate your inventory turnover ratio to gain further insight into your sales performance.


Physical Inventory Count: Best Practices and Tips

With experience, you’ll get better at inventory counts. Here are some helpful tips to keep in mind and integrate into your strategies when possible.

  • Set up a dedicated inventory department or team
  • Implement cycle counts and full inventory counts
  • Schedule frequent counts for high-value items
  • Utilize technology like scanners or barcodes and tags to easily track items by SKU
  • Use inventory management software
  • Schedule a convenient counting time
  • Create a map of your facility or storage space
  • Label items, shelves, bins, and boxes for easier navigation
  • Organize all products and group similar items together
  • Draft a list of excluded items, if any
  • Immediately address all issues that arise
  • Train your staff and give them clear instructions
  • Perform a mock count during the planning stage
  • Ensure only required staff is at the site during counting
  • Stop operations during the count and secure the stock area
  • Make sure the prices of items aren’t visible during the count


What Are the Methods of Physical Inventory Counting?

Depending on the type of business and inventory, there are four different methods of doing a physical inventory count.

Manual Counting

This traditional method relies on paper, count cards, and pencils to record inventory. Manual counting is easier to do when you’ve got a small inventory.

Otherwise, this process can be incredibly time-consuming. It also has many drawbacks, such as a high margin for error—the counting is entirely dependent on how well your employees record the data and maintain the sheets of paper given to them.

However, many businesses prefer it because it is a low-cost method requiring little more than manpower and time.

Electronic Counting

Electronic counting switches out paper and pen for more high-tech tools like scanners, RFID or barcodes, mobile devices, POS systems, etc. It is preferred by businesses with a substantial amount of inventory to speed up the process.

Electronic counting also results in fewer errors since all the counting is being done by scanners. What’s more, the data is immediately uploaded to the inventory system.

Cycle Counting

The cycle counting method involves dividing inventory into portions and counting one at a time. Such counts may be performed daily for companies with medium to large stocks.

Also known as partial inventory counts, this method requires a small team and takes significantly less time than a full inventory count. Since it is only performed for a small portion of the inventory, it doesn’t require you to shut down operations. You can manage by closing the section that is being counted that day.

Full Inventory Counting

This method involves counting the entire inventory at once and is often done at the end of a calendar year when the rush is at its lowest.

Since all items are being counted, this method requires a lot of time and labor. Companies conducting full inventories often need to bring in temp staff and close their operations entirely for the duration of the process.

The best thing about a full inventory count is that it provides an accurate record of all items on hand. This is valuable data for the company moving forward.


Physical Inventory With Nest Egg

Managing inventory is a demanding task, no matter the stage of business development. Finding the right partners and software solutions can take the load off your hands.

Nest Egg can be your partner at every stage of inventory management. Whether it’s about implementing barcode scanners or deploying inventory management solutions, talk to us about your growing business needs!

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