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Physical Inventory Count: What It Is, Procedures & Best Practices

Physical Inventory Count: What It Is, Procedures & Best Practices

Inventory count isn’t just like a two-year-old counting wooden blocks. It requires effective resources planning, tools and the right talent to help. This article covers the basics of physical inventory counting, covering what it is, procedures and best practices for inventory count. Read on to learn more!
Written and published by
Brian Tsang

Anyone can count numbers just like a two-year-old can count from 1 to 10. Performing a physical inventory count, however, isn’t as simple as that.

Taking a physical count of inventory requires not only basic numeracy skills, but also effective resources planning, tools and the right talent to help.

If you’re new to inventory management, or are just getting started on stocktake for your store or warehouse, you’re at the right place.

This article covers the basics of physical inventory counting, covering what it is, procedures and best practices. Read on to learn more!

  • What is an inventory count?
  • Inventory count methods
  • How to do a physical inventory count
  • When is a physical inventory count usually taken?
  • Best practices for physical inventory count

What is an inventory count?

An inventory count, also known as stocktake, is the practice of counting stock on hand. It’s primarily a manual process, requiring your staff members to walk around the sales floor, stockroom or warehouse to complete.

Despite being a rather tedious process, inventory counts are essential to any business that sells tangible goods.

They let you know the quantity of goods actually in stock, so that you can compare the numbers with those on the books and verify that you have the right amounts of inventory on record.

Inventory count methods

Broadly speaking, there are three types of inventory counts: full counting, cycle counting and ad hoc counting. Each of these inventory counting methods is explained below.

1. Full counting

Full counting involves a total review of all goods in your warehouse or store. To ensure the accuracy of counting, no goods should move in or out during the process.

Full counting example

You run a 3PL company which provides warehousing and fulfillment services to e-commerce clients. At the end of every month, you perform full counting on all goods in the warehouse and generate an inventory report for each of your clients.

Pros and cons of full counting

While this type of inventory count has the benefits of being thorough and accurate, it’s often time-consuming and labor-intensive, requiring an operational shutdown during the count.

2. Cycle counting

With cycle counting, staff members count a specific portion of goods at one time, then move on to other portions at another time. The process is repeated until all goods have been counted within a given period.

Cycle counting example

You work at a large warehouse with lots of SKUs. Inventory count is performed at the end of each month, with one-twelfth of goods being counted each time.

Pros and cons of cycle counting

On the plus side, cycle counting doesn’t require a pause to warehouse or store operations because only a portion of goods is counted each time.

Yet, it’s possible that items scheduled to be counted are sold or shipped before your staff has a chance to count them, sometimes resulting in inventory inaccuracies.

3. Ad hoc counting

Ad hoc counting, also known as spot or blind counting, refers to inventory counts which are unscheduled and unplanned.

This inventory counting method is often used to rectify inventory record inaccuracies observed outside of a counting period.

Ad hoc counting example

A customer wants to buy a lilac scented candle at your boutique.

Your inventory management software shows that four of this product are in stock, but your staff only finds two lilac scented candles in the stockroom. In this situation, you can order ad hoc counting of candles at your store to resolve the discrepancy.

Pros and cons of ad hoc counting

As a timely response to adjust inaccuracies in inventory records, ad hoc counting provides you with the flexibility to tackle emergencies and correct errors made in previous counts.

There’s not much drawback with this inventory counting method, but there are some challenges. 

For instance, staff members may not be aware of the need to do an ad hoc count even when inventory discrepancies are observed. The burden therefore falls on the store or warehouse manager to remind team members as to when ad hoc counting should be used.

→ Quick summary: This section discusses three inventory counting methods, which are full counting, cycle counting and ad hoc counting.

How to do a physical inventory count

Performing a physical inventory count is a multi-step process, involving different stakeholders in your warehouse as well as other departments in your company.

Below are the procedures of an inventory count:

  1. The manager gives out warehouse layout maps, inventory tags and equipment to staff members.

  2. Staff members count inventory in warehouse sections assigned to them and fill out inventory tags (more on this below).

  3. Once the initial count is complete, staff members return inventory tags to the manager.

  4. The manager enters inventory data into the inventory system, and compares the actual quantities of stock with the theoretical amounts.

  5. In cases where there are discrepancies between the actual and theoretical quantities, staff members will justify the discrepancies (e.g. some goods are spoiled).

  6. If the discrepancies can’t be justified, the manager will assign staff members to recount the relevant inventory.

  7. Staff members report data changes to the manager.

  8. After confirming the count data, the manager passes it to the accounting department.

  9. Accounting department audits the inventory data.

  10. Upon receiving approval from the accounting department, the warehouse manager announces that the warehouse resumes normal operations.

When is a physical inventory count usually taken?

Ideally, physical inventory counts should be performed as often as possible. This helps you uncover inventory issues in a timely manner, hence ensuring accounting accuracy.

When company resources don’t allow for frequent stocktakes, physical inventory counts are usually taken at the end of a period, such as a month, season or year.

Best practices for physical inventory count

Stocktake is a tedious yet essential task for anyone holding physical inventory. To help you optimize the workflow of inventory counting, we’ve rounded up some best practices for you.

1. Choose the right counters

Assigning the right people to do a stocktake can save significant labor costs and hours. Ideally, your team of ‘inventory counters’ should have the following qualities:

  • First, those staff members should be scheduled to work on the date of count. You can assign extra work shifts to them for performing the stocktake.

  • Second, they should be familiar with the layout of your warehouse, so they won’t run around like blind horses.

    Some warehouse managers prefer to let employees work in pairs though. This is usually done by partnering an experienced employee with a relatively new staff member, who can provide fresh perspectives on how things work.

  • Third, your team members should come from an appropriate rank.

    Perform a cost analysis of staff salaries and determine which employees are most suitable for stocktake. Alternatively, you may recruit outside help if you find this method more economical.

2. Keep everyone in the loop

Although an inventory count may not involve all your staff members, it’s best to keep everyone in the loop about your stocktake plans.

For starters, employees responsible for stocktake should know about training dates, when to work extra shifts and how to perform a count.

Other staff members must also be informed of your plans because no goods should move in or out during an inventory count.

3. Train your staff

Doing an inventory count is the grown-up version of your two-year-old son counting wooden blocks at home… No, it’s much more complicated than that.

Given the complexity of a physical inventory count, a pre-count training session is necessary.

Go through everyone’s duties, explain the procedures and demonstrate how to use the electronic counting equipment. Use a floor plan to aid your explanation, or take your staff for a walk around the warehouse so that they can familiarize themselves with the actual environment.

4. Label your warehouse

When preparing for a physical inventory count, the best practice is to label your warehouse and create a layout plan for it. By assigning letters (A-Z) or numbers to each row, shelf and bin, you can:

  • Create a floor map which everyone can refer to

  • Assign warehouse sections to different team members for inventory count

  • Easily reference which sections of the warehouse have or haven’t been counted

Example of warehouse layout map
Source:
NetSuite

5. Use inventory tags

Use inventory tags — sequentially numbered two-part labels designed for physical inventory counts — when you’re doing a manual stocktake.

As you perform a count, fill out inventory tags with the relevant information. Attach one of the sheets to the storage location and keep another for reference. This way, you’ll be able to keep track of what has been counted and what hasn’t.

Source: To-Increase

6. Automate the process

Inventory tags are helpful for inventory counting indeed, but as long as you’re using pen and paper, the manual process is slow and inefficient. What if you can digitize the counting process altogether?

Check whether your inventory management software supports physical asset tracking, such as with a barcode scanner. You may also use other tools (e.g. mobile app) or technology (e.g. RFID) to streamline the counting procedure as much as possible.

Example of a barcode scanner for inventory count
Source:
Veeqo

7. Treat your employees well

Physical inventory count could be a long and monotonous process, especially when you have large amounts of stock in your warehouse. Remember to keep your staff well-fed and hydrated, with regular breaks to recharge their body batteries.

You can also sprinkle a little fun into the drudgery, such as by hosting a friendly competition and rewarding the best-performing team with small gifts. A motivated workforce is the key to getting things done!

→ Quick summary: This section discusses seven best practices for physical inventory count. They are summarized below:

  1. Choose the right counters
  2. Keep everyone in the loop
  3. Train your staff
  4. Label your warehouse
  5. Use inventory tags
  6. Automate the process
  7. Treat your employees well

Some last words

If you run an e-commerce business, you’ll know that stocktake is just a small part of inventory management, and inventory is just one item on the long list of problems you have to tackle.

From e-commerce funding to increasing conversion rate and expanding across borders, each is a pain point that could lead to countless sleepless nights.

As the funding and growth partner of digital merchants, our team at Choco Up understands your problems and we’re here to help.

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About Choco Up

Choco Up is a global technology and financial services platform, offering revenue-based financing and business growth solutions for digital merchants and startups.

With data analytics and machine learning at its core, Choco Up employs vast integrations to automate fund deployment, providing fast-growing companies with zero-equity funding in a quick and seamless manner.

We currently have offices in Singapore and Hong Kong and serve clients worldwide, providing smart-growth analytics and global payment solutions to fuel their growth.

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