If you have a retail or manufacturing business, or any business with stock items, a significant amount of your working capital is tied up in inventory. But in order to account for that inventory, a physical count of raw materials, work-in-progress and finished goods is essential at year-end. For calendar-year entities, your year-end is fast approaching on December 31.

Although an inventory count seems like a tedious and intimidating task, it is essential in the success of your business. Here are a few tips to maximize the benefits and minimize the hassle.

Reviewing the Basics

To capture a static value at year-end, it’s essential that business operations “freeze” while the count takes place. Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Often, larger companies break down their counts by physical location.

Advance planning is the key to minimizing disruptions. Before the counting starts, management generally should:

Use Prenumbered Inventory Tags
Use sequential two-part tags to count inventory. One tag stays with the item on the shelf; the other is returned to the manager at the end of the count. By using tags, you can prevent double counts or omissions. Each tag should identify the part number, location, quantity and person who performed the count.

Preview Inventory
Perform a dry run a few days before the count to identify any potential roadblocks and determine how many workers to schedule. This makes the count more efficient and gives warehouse personnel the opportunity to correct any foreseeable problems.

Assign Workers to Count Inventory
Assemble two-person teams to prevent fraudulent counts. Assign each team a specific area of the warehouse to count. Don’t give employees inventory listings— otherwise, they may be tempted to duplicate the amount from the listing, rather than bring attention to a possible discrepancy.

Write Off any Unsalable Items
Throw away all defective or obsolete items before the inventory count begins. There’s no sense counting items that will be written off.

Precount and Bag Slow-moving Items
To make the physical count faster, you can count some items in advance that you don’t expect to use before year-end. Tag pre-counted items and place them in sealed containers to prevent a double-count.

If your company issues audited financial statements, one or more members of your external audit team should be present during your physical inventory count to observe procedures and verify the count.

Understanding the Importance of Accuracy

You want a reliable estimate of ending inventory so that the profits you record this year are accurate. Your cost-of-sales is a function of the value of beginning and ending inventories.

Accountants estimate cost of sales expenses with this seemingly simple formula: cost of sales = beginning inventory +purchases –ending inventory.

Keeping the inventory count accurate is essential because:

  • You need to know how profitable the company truly is.
  • Lenders rely on inventory as a form of loan collateral.
  • Stockholders look to inventory-based ratios to evaluate financial strength.
  • If disaster strikes, your insurance coverage should be adequate to cover any inventory losses

Making Counts Count

Well-executed physical inventory counts are invaluable for:

  • Accounting compliance
  • Fraud prevention
  • Feedback to evaluate how to stock items more efficiently,
  • Reducing carrying costs

In turn, more efficient inventory management can lead to improved customer satisfaction and higher sales.

Seek External Input

When it comes to physical inventory counts, accountants at PDM have seen the best (and worst) practices over the years. And they can advise you on how to more efficiently manage your inventory. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.