As December comes to a close, it’s time for calendar-year entities to perform physical inventory counts. An accurate and efficient inventory count is essential for financial reporting, tax compliance, and effective business planning. In this article, we’ll explore best practices to help streamline your year-end inventory counts and minimize discrepancies.
Planning and Organization
Before starting a physical inventory count, it’s essential to develop a comprehensive plan. Important steps include:
- Allocate specific dates and times for the inventory count to ensure all team members are available.
- Define clear roles and responsibilities for each team member involved in the counting process.
- Determine acceptable variance thresholds for count and dollar values.
- Inform relevant stakeholders, including employees, suppliers, and customers, about the upcoming inventory count to minimize disruptions.
- Document the plan with written instructions that include reconciliation and recount procedures.
Categorize and Classify Inventory
Efficient inventory management starts with proper categorization and classification. Group items based on their characteristics, such as product type, size, or value. This makes it easier to organize the counting process and ensures no items are overlooked.
Write off unsalable items and dispose of them properly before the count begins. Ensure non-inventory items are marked clearly and identifiable separately.
Utilize Technology
Leverage technology to enhance the accuracy and speed of the inventory count. Barcoding systems, RFID (radio frequency identification), and inventory management software can significantly reduce human errors and streamline the counting process. Consider investing in technology that integrates with your existing systems for seamless data management.
Conduct Pre-Count Audits
Perform pre-count audits to identify discrepancies and address any issues before the official count begins. This helps in minimizing the chances of errors and ensures a smoother counting process. Correcting inaccuracies early on can prevent larger problems during the final count.
To make the physical count faster, some items that aren’t expected to be used before year-end can be counted a few days in advance. Pre-counted items should be tagged and placed in sealed containers. If a broken seal is noticed on the day of the actual physical count, the items in the container should be recounted.
Implement a Freeze Period
Establish a freeze period that restrict any movements or transactions involving inventory items before the count begins. This prevents additional stock from entering or leaving the premises, reducing the likelihood of errors during the count.
Train and Educate Staff
Provide clear instructions on counting methods, the use of technology, and any procedures unique to your business. A well-trained team is more likely to conduct an accurate and efficient inventory count. Ensure the teams understand the unit of measure that needs to be counted.
For example, a part that comes in boxes of 10 units might be listed in the system as a single box or as 10 items.
Analyze the Results
Count tags and results should be processed timely and significant variances from the books should be investigated. Recounts should be performed by a separate team or supervisor. Supervisors should perform random audits of completed counts.
Document and Communicate Findings
Thoroughly document the results of the inventory count. Note any discrepancies and investigate the reasons behind them. Communicate the findings to relevant stakeholders and implement corrective measures to prevent similar issues.
Identify Improvement Opportunities
After completing the year-end inventory count, conduct an analysis to identify areas for improvement. Solicit feedback from team members and assess the effectiveness of your procedures. Use this information to refine your inventory management processes for the upcoming year.
Other Planning and Count Tips:
- Establish blind counts. Avoid confirmation bias by utilizing a blind count. Provide a counter with the part, location, and other relevant information, but don’t list the quantity expected to be on hand.
- Utilize two-person teams. Assemble two-person teams to prevent fraudulent counts. Assign each team a specific area of the warehouse and provide a map identifying count zones. Two-person teams can focus on the granular counts more quickly.
- Use prenumbered inventory tags. If you conduct a count without the aid of barcode scanners, utilize two-part tags that are numbered sequentially. One tag stays with the item on the shelf and the other is returned to the manager once complete. The tags should include the count team’s name, part number, count, and location.
The Auditor’s Role
If your company issues audited financial statements, one or more members of your external audit team will be present during your physical inventory count. They aren’t there to help you count inventory. Instead, they’ll observe the procedures, review written inventory processes, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.
Be ready to provide your auditors with invoices and shipping/receiving reports. They’ll review these documents to evaluate cutoff procedures for year-end deliveries and confirm the values reported on your inventory listing.
Making Your Inventory Counts Count
Year-end inventory counts are a critical aspect of business operations, impacting financial reporting and strategic decision-making. By following these best practices, businesses can enhance the accuracy and efficiency of their inventory counts and improve their overall inventory management.
As auditors, we’ve seen the best (and worst) practices over the years. For more information on how to effectively perform year-end inventory counts, contact us.
