What Does Taking Physical Inventory Involve?

Physical inventory refers to the process of manually counting, weighing, or otherwise quantifying every item currently held in your warehouse, fulfillment center, retail location, or other facilities. This provides you with extremely accurate data on your stock levels, allowing you to compare the real-world figures to your existing inventory management records.

For businesses that handle a lot of products, counting inventory can be a massive undertaking potentially involving closure of facilities so that counts can be conducted without interference from regular operations. An inventory count should document details like:

• Product SKUs
• Exact quantities on hand for each item
• Locations of various products
• Any damages, defects, or quality issues noticed

Once counting is complete, you can compare the results to your expected stock levels based on purchasing and sales records. This reveals any inventory errors like theft, damages, or database inaccuracies so they can be addressed.

Why Year-End Inventory Counts Are Critical

While regular cycle counts are important for inventory accuracy, a comprehensive physical inventory at year-end provides unique benefits that support sound financial practices and operational efficiency.

Calculating Cost of Goods Sold: For tax purposes, you must determine your business’s cost of goods sold (COGS) annually to ascertain net income or loss. Since the value of your year-end inventory directly impacts this key calculation, an accurate count is essential.

Detecting Shrinkage Issues: A yearly physical inventory review makes shrinkage stand out clearly. If your actual stock doesn’t align with projections, it allows you to pinpoint problems like damages, miscounts, theft, or other causes of loss so you can implement preventative processes. This protects profits.

Informing Better Decisions: An accurate inventory overview enables data-backed decisions about purchasing, storage needs, staffing, loss prevention, and more as you enter a new financial year. This leads to supply chain optimization.

Planning Sales or Cycles: For businesses with annual sales cycles, a physical inventory check allows you to verify that you have adequate quantities on hand to meet customer demand without tying up excess capital unnecessarily.

The Importance of Inventory Accuracy

An accurate inventory count is crucial for several reasons beyond calculating taxes and detecting shrinkage. A few key benefits include:

Improved Customer Service Levels: When you have reliable visibility into actual product availability, you can confidently make sales promises and meet customer delivery expectations. Overselling stock leading to backorders or stockouts erodes trust.
Better Demand Forecasting: With concrete data on true stock positions, your demand planners can create superior projections for future inventory needs. This allows you to align purchasing and production with expected sales more precisely.
Increased Operational Efficiency: When inventory data aligns with reality, warehouse workers can optimize picking paths, ensure adequate storage space, and improve product slotting to boost productivity. Confidence in inventory accuracy leads to process improvements.
Funding Core Business Functions: For some businesses, inventory itself acts as collateral that allows increased borrowing capacity from lenders. Thus, verified quantities can facilitate access to working capital necessary for growth.
Mitigating Supply Chain Risk: From unexpected demand spikes to overseas shipping delays, supply chain disruptions remain commonplace. However accurate inventory counts help quantify your existing buffer so contingency plans reflect your true ability to absorb volatility.

Streamlining Year-End Inventory Processes

Careful preparation and management are key to making huge inventory counts efficient. Here are some top tips for streamlining your year-end physical inventory process:

Schedule Strategically: Choose a slower sales period so you can minimize business disruptions. Often January provides a perfect window between holidays and the new year rush.

Classify Products: Sort items based on sales velocity (ABC classification) so prioritization decisions are streamlined.

Enlist Help: Depending on inventory size, you may need additional staff or 3PL assistance. Provide training to anyone assisting with the count.

Map Out Locations: Create detailed maps showing all inventory locations to simplify searching and ensure comprehensive counts. Distribute to all counters.

Organize Inventory: Straighten shelves and storage areas so nothing gets missed. Group like products together.

Support Counters: Ensure teams have needed equipment like scanners for efficiency. Provide packing materials like boxes or crates to hold counted items.

Track Progress: Use checklist templates, maps, or warehouse management software to mark sections once counting in specific areas concludes.

Perform Cycle Counts: Supplement a major physical count with more frequent cycle counts of especially valuable stock or fast-moving products.

Year-end Physical Inventory Count Accuracy Best Practices

Alongside periodic cycle counting and annual physical inventory reviews, you can employ several ongoing best practices to sustain inventory accuracy:

Invest in WMS Solutions: Advanced warehouse management systems with real-time tracking preserve visibility as products move through fulfillment workflows. This forms a perpetual inventory management backbone.
Incorporate Scanning: Leverage barcode and RFID scanning at all critical inventory handling points like receiving, putaway, picking, and shipping. This instantly updates volumes in the WMS.
Perform Regular Audits: Even with strong inventory control technology, periodic hands-on spot checks verify that everything is capturing correctly at a granular level. Quickly address any inconsistencies.
Train Staff Thoroughly: Review standard operating procedures surrounding inventory transactions with warehouse personnel routinely to ensure systematic data capture and reinforce accountability at every turn.
Seek External Expertise: Work with experienced inventory management partners or consultants to gain an independent perspective on existing processes and tools while benefiting from industry best practices.

Rather than an annual inconvenience, view physical inventory counts as instrumental for unlocking transformative benefits, from supply chain resilience to data-driven growth, leading into the new year. Contact fulfillment experts for personalized guidance tailored to your operations.