How to take a physical inventory count

Keeping count of inventory is crucial to the success of any business, especially in retail and food service settings. Being aware of what is in stock and what items are needed make inventory management one of a business’s most beneficial tools. These inventory management techniques can help lead a business to financial success.

Why use inventory management for a physical count?

Employing a system for managing inventory serves several purposes. In addition to merely knowing what items are in stock, business managers gain insights into:

• Actual sales versus projected sales
• If and when loss and damages occur
• Imbalances in order quantities
• Spoilage costs for food service companies and flower shops
• Physical space usage for storage and displays

But in order to glean these insights, retailers, restaurant owners and all businesses with physical inventory need to find the right techniques to keep them on track.

Organizing physical inventory

Proper inventory management requires organization of products and supplies. From the back room to the sales floor in retail settings or from the pantry and stock room to the kitchen in restaurants, bakeries and coffee shops, physical items should be stored in a manner that allows for an accurate count of stock levels. Employees and managers should be trained on proper stocking techniques such as:

• Clearly labeling storage and sales areas by item type, size, color or other identifying features
• Properly rotating perishable items for spoilage reduction
• Avoiding duplicate storage areas for the same item
• Knowing all areas for items, especially those with multiple sales or usage areas

Cataloging inventory

Cataloguing physical inventory can be done manually or with a point of sale (POS) system, which you can also use to clock in and out of shifts. Some small businesses or businesses with few items and supplies can get by with a manual cataloguing system using hand-written lists or spreadsheets. But the more inventory a business uses, the more tedious and prone to mistakes a manual system becomes. A POS system can track inventory as it’s sold and can also be used for a physical count to verify inventory levels, make special orders or when introducing new products or items into the inventory. Two critical issues for cataloguing effectively are:

1. Categorization: Proper categorization of items can help reduce shortages and overstocking while still keeping needed items in stock.
2. Forecasting Considerations: Outside components that may affect inventory include seasonal considerations, weather events, holiday drive-times or catastrophies that affect supply and demand.

Counting stock and supplies

Successful businesses generally have a good idea of what’s in stock and what’s needed, especially if they have real-time knowledge of inventory counts from a POS system. But physical counts come in handy in many instances:

• When increasing or decreasing storage areas, redesigning sales areas or revamping menus
• During rebranding or change of business focus
• To prepare for seasonal sales, promotions or to closeout product lines
• When performing end-of-year inventory

A physical count of every single item in inventory takes a lot of manpower and resources. This is why estimating inventory can come in handy when an absolute inventory isn’t necessary. But a physical count, whether it involves a degree of estimation or an absolute count, is necessary at times to track what is and isn’t selling, determine shrinkage and reduce dead inventory. Instead of spending valuable resources on a total inventory count, cycle counting is another method that has proven useful in inventory management.

Cycle counting uses a sampling technique in which only a portion of the stock is inventoried at one time. It’s particularly useful for businesses with warehouse storage or many items in stock. After the inventory is catalogued, items can be placed in a cycle for inventory. The cycle count could be daily for some items and weekly, monthly or seasonally for other items depending on the business’s needs. Three types of cycle counting can be used:

1. Control Group: This process is used to test accuracy of the count and is best used when first employing a cycle count and any time new items are introduced into inventory.
2. Random Sample: This method can be used to count the same items frequently (constant population) or to count each item once and then exclude it until all other items are counted (diminished population). This is best utilized for frequently ordered items, seasonal counts and end-of-year inventories.
3. ABC Cycle: This uses the Pareto principle, or the idea that 20 percent of items and supplies account for 80 percent of sales. This method requires multiple counts but may be useful for parts retailers or supply stores.

Dealing with loss and damage

Sometimes the unexpected occurs. Employee theft could be a problem, a shipment could get lost or damaged, or the storage facility or sales area could sustain damage from a power outage or storm. These are all good reasons for implementing an inventory management system as early as possible. If a business already has a system in place, they can easily track loss and damages and deal with the underlying issues quickly. This also allows them to replace or reorder inventory that was lost and prevent extra financial loss from the situation.

Reordering inventory

aIdeally, a business wants to reorder inventory before it’s needed. With a great inventory management system in place, supported by accurate physical counts, the reorder point, or quantity of an item that triggers a purchase to replenish, should be easy to calculate and reach optimal quantity. If the reorder point is off, some questions to ask are:

• Is the item catalogued properly?
• Was the item stocked in the right area?
• Are the items being rotated properly? (for perishable items)
• Has theft occurred?
• Was a shipment delayed or missed?
• Is there an underlying circumstance, such as seasonal demand or local event?