How to Conduct a Physical Inventory

Wait until inventory is low and the store is orderly

Yarn store owner taking inventory with digital tablet

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Most retailers are required by tax or accounting rules to provide an accurate on-hand value of the merchandise in their stores by physically counting all inventory. Although the retail store may be using a perpetual inventory system or other software to keep track of all items, it may still be required to physically count all inventory.

Here's how to conduct a physical inventory with as little disruption and as much accuracy as possible. These tips will make the process more simple and precise for entrepreneurs and their staffs.

How to Count Inventory

Replenish shelves with merchandise from the stockroom. Try to clear as much inventory from the back room as possible. Be sure there is no merchandise under cash wraps, in the office or any other location. You don't want any surprise and unaccounted for merchandise popping up later on.

To conduct the physical inventory count as quickly as possible, schedule a time when sales are slow and inventory levels are down. On a related note, complete a full zoning (recovery) or straightening of the store prior to the physical inventory so all products are neat and orderly for easy counting. Accounting for merchandise when inventory is low and the store is orderly is your best chance for having a smooth inventory count.

If an inventory service has been hired to do the physical inventory, follow the guide they provide and prepare the store according to their instructions. On the other hand, if the physical inventory is being conducted by store employees, meet with staff to explain the inventory counting process.

The store manager should spot check several of the count sheets to verify accuracy in counting by employees. Assign each employee a location and provide pre-numbered inventory count sheets detailing the inventory with item name, price and inventory level. Make sure, the inventory team includes several people and that they have pencils with erasers to easily correct mistakes.

If you have any reason to doubt your staff's ability to successfully pull off a physical inventory, you might want to follow your gut and go with an inventory service instead. Better safe than sorry when it comes to such a tedious process.

When Discrepancies Arise

The individuals conducting the inventory should count each item on their sheet and only record the exact quantities. When the physical inventory count is completed, compare the physical count to the perpetual inventory record. 

Discrepancies should be further investigated and resolved. A recount may be required by a different counting team for any major discrepancy. If you decided to use your own staff rather than an inventory service, a discrepancy in the count may be a red flag that someone dropped the ball. A recount that results in no discrepancies is one option you have to see to it that the error is fixed.

When the Inventory Process Wraps Up

At the end of the inventory process, adjust the perpetual inventory record for each line item to reflect the quantity and value of the physical inventory. Tags showing completed zones should help on this end.