How to prepare to take a physical inventory

In the life of every retailer, taking a physical inventory is one of the unavoidable things that you should do at least once a year. However, like someone who has a toothache and puts off going to the dentist, I have heard about every excuse NOT to take a physical inventory.  I have too much stuff, I don’t have very much stuff, my dog ate my homework (oh wait, that is a different excuse).  Unless retailers commit to doing a physical inventory AT LEAST once a year, they risk paying too much in taxes, or worst yet, not being able to withstand an audit, since the Cost of Goods Sold are directly tied to your inventory asset value and sales.

So, once you have decided to do an inventory, what next?  In our next few articles, we want to help you to prepare for the physical inventory process.

First and Foremost, the most important thing is to properly plan how to do your physical inventory.  I have seen too many retailers who’s just try to wing it and end up with incorrectly counted inventory.  It is almost better not to have done inventory at all, then to do it incorrectly. With that in mind, what are some of the questions you should be asking yourself before starting the process?

  1. How many locations are you counting?
  2. Is the inventory you are counting bar-coded and do you have the systems in place to use the bar-codes to count?
  3. How comfortable is the staff with your inventory and where it is located?
  4. Will/Can you close the store while you take your inventory?
  5. How will you know when you are done?
  6. What accounting adjustments will you need to make, if any?

Let’s take them in order:

  1. How many locations do you have inventory?  I am not talking about just physical stores. What about the storage unit you rented to keep seasonal merchandise?  We have been in several retailers where they use the bathroom to store stock???(yikes) Make sure you go through the store or stores and open every drawer and cabinet, storage closet, etc.  Make a list of every place you find inventory and then check it again.
  2. Is your inventory bar-coded?  A number of the better Point of Sale Systems provide the ability to take a physical inventory using either the bar code scanner or even a device designed specifically for that purpose.  It is far faster and more accurate to scan bar codes into a system than to print a list and write everything down.
  3. How comfortable is your staff with the inventory?  If you are considering hiring an outside service, make sure you meet with them before to get a proper scope of your requirements. Will they be using their own equipment?  If so, how will they give you the inventory information? In a spreadsheet or on a report? If so, can you import the changes into your system.  If you will be doing the count with in house staff, consider the skill set of your employees. That perfect salesperson who has exceptional people skills may lack the focus and attention to detail that is needed to properly count.

In our next article, we will cover the last three points and offer some suggestions to ensure you have the best outcome possible. If you have gained anything from my articles, it is the fact that retailers must have a laser focus on inventory. It is your largest purchase and the biggest area where retailers get into trouble.

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