Conducting a physical inventory count is an important activity for businesses of all kinds. While retailers might first come to mind when thinking about measuring physical inventory, in truth, all types of businesses — from manufacturers to services organizations — carry an inventory of some kind.
A physical inventory count requires attention to detail, precision and a well-thought-out process. A physical inventory count checklist can be an excellent way to ensure you understand and follow the right steps, ensuring accuracy and making the most of your efforts.
What Is a Physical Inventory Count?
As the name suggests, a physical inventory count is an organized, methodical and structured process used to count a business's stock. Businesses use physical inventory counts to provide an audit or verification of the data in inventory systems and conduct them at scheduled times that typically coincide with financial reporting periods. Inventory counts are also critical for ensuring sales and purchase forecasting reliability.
There are two primary methods of conducting a physical inventory count:
- Manual — Using paper and pencil to count and record inventory.
- Electronic — Relying on technology like scanners, RFID, barcodes or mobile devices to count items.
If you're trying to determine the best way to count inventory, businesses often choose cycle counting. Cycle counting and inventory control software can help to eliminate the root causes of errors by creating more dependable control processes. Supporting a cycle counting strategy with inventory management software can automatically prompt employees to count certain items and categorize produces based on volume or value. Ultimately, this leads to more accurate inventory information and better quality assurance.
The ultimate goal in conducting a physical inventory count is for the records to match products on hand as closely as possible.
24-Step Physical Inventory Count Checklist
When conducting a physical inventory count, employees need to take several steps to ensure the process is as seamless and accurate as possible. Here’s a physical inventory count checklist — covering pre-count, during the count and after the count.
- Select and notify the employees involved in the physical inventory count. That can be a combination of seasoned and new employees, but you want to select trustworthy, detail-oriented and conscientious employees. Put these employees in pairs where one employee counts and the other records.
- Schedule a time for the count. That is generally done outside of regular business hours and after seasonal rushes, especially in retail settings, to avoid disrupting customers and daily operations.
- Train all employees involved in the physical inventory count. Ensure they receive clear details about the steps they must take and how to conduct and document the count.
- Organize your count by location rather than by product. That helps to make the process more efficient and provides an orderly way for employees to conduct the inventory count.
- Create maps or diagrams indicating the counting areas and clearly labeling the inventory stored in each area.
- Ensure that all inventory is clearly labeled with fixed labels (so they aren’t likely to move or fall off shelving) and those labels are easy to find and read, if not using bin management.
- Assign employees to specific areas that they are responsible for counting. That helps manage the counting process and makes it easy to identify employees who may need to provide or clarify information after the count is finished.
- Track any consignment products you stock separately. Avoid including them in the same count as other inventory items. Consignment inventory refers to items that continue to be owned by the producer while another company (like a retailer or distributor) stores them and ships them to customers, only paying for the inventory once it sells.
- Get count tags. Count tags are two-part forms that are filled out by those conducting the physical inventory count. They are numbered to help document inventory and ensure accurate recordkeeping. Scanners and other electronic counting devices automate this process.
- Make plans to observe areas where inventory is being counted. Consider scheduling "surprise visits," especially in areas where valuable items are located, to reduce the chances of theft or fraud.
During the Count
- Designate a person to demonstrate the process on the day of the count to ensure employees understand what they are doing and how the process works. Make sure everyone receives examples of the documentation method you use as a guide for them to follow.
- Avoid stopping all activity in the warehouse. But it's crucial to ensure that no stock is coming in or leaving the area as the physical inventory count occurs. That will lead to confusion and increase the chances of mistakes.
- Team members should fill out a count tag, attaching one copy to the inventory item and retaining the other copy whether they’re counting manually or using a scanner. The project leader collects the tags and confirms that they have been filled out appropriately and that no tags are missing.
- Tags should be reviewed for accuracy, then given to staff members assigned to input the information into the inventory management system. If you’re using scanners, this won’t be necessary since the information automatically feeds into the system.
- As areas are counted, staff should mark them so it is clear that the count of inventory has already been conducted in that area.
- Conducting spot checks is a crucial step to ensure accuracy and help spot potential errors or process breakdowns that need to be corrected.
- Leave misplaced items where they are if you come across any during the count.
- Conduct a final tour of the areas being counted. Take this step to ensure that all items have been tagged, indicating that they have been counted.
- Plan time for breaks and provide food and refreshments to employees to thank them for their contributions, especially when counts occur outside of regular working hours.
- Analyze the physical inventory count results to identify and resolve any problem areas or where process improvements might be needed to improve inventory accuracy.
- Communicate broadly with employees, not only those involved in the count but all employees throughout the organization. Let them know the physical counts' results, any major discrepancies, and seek their input on what might have led to these mismatches.
- Take steps to investigate any suspicions of theft if your inventory count raised any such concerns.
- Take steps to evaluate and update procedures, implementing cycle counting to facilitate future counts, and institute training or improve communication if your physical inventory count suggests employee error.
- Recognize and reward employees in areas where the inventory count showed high levels of accuracy. Offer constructive feedback to employees in areas where there were significant inconsistencies. Seek their input to establish new policies, procedures and practices to minimize such problems in the future.
Move Beyond Spreadsheets With Inventory Management Software
While some companies use spreadsheets or even paper to manage inventory, this is far from an ideal solution. Not only are these approaches prone to error, but they fail to offer the more robust functionality of inventory management software that can help minimize waste and maximize the ability to make informed decisions related to purchasing and sales.
Today's cloud inventory management software can track products across numerous locations and gives your workforce access to up-to-the-minute data on inventory levels at all times. This technology can automate replenishment, lot and serial tracking and cycle counting. The right system will help establish better inventory management practices that help you save time, reduce errors and arm your management staff with the information they need to make essential business decisions.
An inventory management system and cycle counting can reduce the frequency of physical counts since each item is tracked as it enters, moves around and leaves your facility while yielding fewer discrepancies to resolve. When you do need to complete a physical count, they will be faster and more accurate with this software in place. This is especially true for businesses that use scanners connected to the inventory management solution.
Inventory management is a critical element of any business's operations and significantly impacts the bottom line and overall success. Conducting physical inventory counts regularly — often yearly in conjunction with the annual budgeting and reporting cycles — ensures accurate records and helps with important choices about stock levels to meet customer demand and ensure continuity in business operations. Using technology to improve inventory management process and streamline physical counts can help your business reduce handling costs and increase cash flow.