When Is Physical Inventory Usually Taken? Find Out Here!

Physical inventory is an essential process in keeping track of the actual physical possessions and stock a company has. As opposed to virtual records, taking stock physically involves counting goods manually, comparing them with the recorded numbers, identifying any discrepancies, and making necessary adjustments.

The decision on when to carry out a physical inventory largely depends on the type of business and its operational policies. In some industries like retailing, seasonal changes may influence inventory levels, while other businesses might opt for random checks.

“The timing of a physical inventory affects the accuracy of your stock count and ultimately impacts your financial statements.”

A timely physical inventory eliminates guesswork and helps companies fix issues that can potentially hurt their bottom line. It provides insights into things like damaged or missing stock, recurring pilferage and theft situations, order-to-shelf inconsistencies, storage problems, and many more. In fact, without a proper schedule, tracking physical inventory may become increasingly difficult. This post will highlight how often different businesses perform their inventories, the factors that determine such schedules, and why it matters.

If you own a small or medium-sized business that deals with large volumes of physical items, this guide is for you! Continue reading to learn appropriate times to take physical inventory and ways to make the process efficient and effective.

The Importance of Physical Inventory

When is physical inventory usually taken? This important process is typically performed annually or bi-annually, depending on the size and scope of your business. However, some businesses may opt to conduct physical inventory checks more frequently in order to maintain accurate stock levels.

Ensuring Accurate Stock Levels

Performing regular physical inventory checks is critical for maintaining accurate stock levels. By counting every item on hand and comparing those figures to what is recorded in your records or software system, you can identify discrepancies and take steps to correct them immediately.

Accurate stock levels are essential for ensuring that your customers always have access to the products they need. When stock levels are incorrect, it can lead to lost sales, dissatisfied customers, and decreased revenues. Additionally, inaccurate stock levels may cause you to waste money by ordering too much or not enough of certain items.

Identifying Inventory Discrepancies

Physical inventory checks provide an opportunity to identify discrepancies between what is actually on hand and what is recorded in your system. There are many reasons why these discrepancies might occur, such as theft, human error, damage, or miscounting during receiving or stocking processes.

By identifying inventory discrepancies promptly, you can take steps to address them before they become bigger problems. You can investigate the root causes of any discrepancies and determine whether additional training, better processes, or other changes are needed to prevent similar issues from occurring in the future.

Preventing Theft and Losses

An unfortunate reality of running a business is that there will always be individuals who attempt to steal from you. Physical inventory checks can help to deter theft and losses by making it clear to employees and others that you take inventory control seriously.

In addition to deterring theft, physical inventory checks can help you identify when items have been lost or damaged. This may allow you to make a claim with your insurance carrier, apply for a credit from your supplier, or take other appropriate steps to mitigate the financial impact of any losses.

Meeting Financial and Legal Requirements

Physical inventory checks are also important for meeting various financial and legal requirements that may be imposed on your business. For example, in some cases, periodic physical inventory checks may be mandated by tax laws or other government regulations.

Additionally, lenders and investors often require businesses to maintain accurate inventory records as part of their due diligence processes. By conducting regular physical inventory checks, you can ensure that your records are up-to-date and credible, which could help you secure financing or attract investments.

“Inventory is money sitting around in another form. You must account properly for inventory to control costs.” -Robert H. Perry

Physical inventory checks are an essential component of effective inventory management. By ensuring accurate stock levels, identifying discrepancies, preventing theft and losses, and meeting financial and legal requirements, businesses can protect themselves and their customers while maintaining profitability.

How Often Should Physical Inventory Be Conducted?

Physical inventory, also known as stocktaking, is defined as the process of counting and reconciling a company’s entire inventory. It involves manually verifying the physical quantities and condition of products against their recorded values in the company’s inventory management system.

The frequency at which companies conduct physical inventory varies depending on various factors such as inventory turnover, changes in business operations, and seasonal sales and promotions.

Depends on Inventory Turnover

Inventory turnover is the number of times a company sells and replaces its inventory within a particular period. Companies with high inventory turnover generally require more frequent physical inventory compared to those with low inventory turnover.

According to the National Retail Federation (NRF), most retailers typically conduct physical inventory twice a year or every six months. For businesses with higher inventory turnover rates, it may be necessary to conduct physical inventory quarterly or monthly to avoid stockouts and overstocking issues.

“Consistently working to ensure that your data is accurate is critical for successful retail operations,” said Mark Mathews, NRF vice president of research development and industry analysis. “Retailers understand this need but still struggle to consistently reach 100 percent accuracy, leading them to focus on conducting physical inventories as often as twice per year.”

Frequent physical inventory helps companies identify discrepancies between what is physically counted and what is recorded in the inventory management system. Identifying these discrepancies allows businesses to adjust inventory levels and reorder products accurately.

Changes in Business Operations

Businesses undergoing significant changes such as mergers and acquisitions, shifting to new markets, or implementing a new inventory management system should consider conducting physical inventory more frequently than usual. This ensures all inventory information is up-to-date and accurate before transitioning into a new phase of business operations.

In addition, businesses that experience significant growth or decline in sales should consider conducting physical inventory to ensure their inventory levels are aligned with the actual demand and avoid issues such as stockouts.

Seasonal Sales and Promotions

Most retail businesses have seasonal sales and promotions throughout the year, such as Black Friday, Christmas, or back-to-school season. Companies usually prepare for these events by stocking up on specific products that customers tend to buy during that period.

It’s essential to conduct physical inventory before and after each major sales event to monitor sales trends accurately and adjust inventory levels accordingly.

“Performing an inventory count after sales allow retailers to determine what sold fast and slow, how many pieces overstocked, where merchandises were placed giving high turnover, and which need further replacement,” explains Junnaida Binti Sulaima, Head Of Marketing at SweetHut Property Management Corporation.

Post-sale physical inventory also helps identify any discrepancies between actual and recorded inventory levels and enables businesses to correct them promptly.

Companies must decide how often they will conduct physical inventory based on their unique factors such as inventory turnover, changes in business operations, and seasonal sales and promotions. Regular physical inventory processes help minimize errors and enhance inventory management efficiency.

Factors to Consider Before Conducting Physical Inventory

Time and Resources Available

In any business, time is money. Therefore, it is important to allocate an appropriate amount of time for physical inventory taking. The process can take several hours or even days depending on the size of the organization’s stockpile. To avoid disruptions in routine operations, plan ahead and schedule inventory counting during off-peak periods.

In addition, allocate sufficient resources such as personnel, equipment like barcode scanners, and IT systems to ensure a smooth operation. You may also need transportation vehicles if you have multiple locations where inventory holding occurs.

Inventory Accuracy and Reliability

The main reason for carrying out physical inventory counting is to validate the accuracy and reliability of the company’s perpetual inventory system. This means that every item in stock must undergo inspection and be accounted for properly before tagging it as “in-stock”.

Accuracy refers to how close the count figures are to actual items held. Reliability refers to how consistently matched the counts are over different counting periods. It is imperative that staff members are well trained either by conducting internal trainings or hiring external experts to guarantee high levels of precision. This helps minimize variances or income fluctuations when calculating sales and generating balance sheets.

Staff Training and Availability

Physical inventory taking is not everyone’s cup of tea. Not everyone has the patience, perseverance, and attention to detail required. Consequently, recruitment is paramount if there are not enough qualified staff members available. Alternatively, consider outsourcing from a reputable third party who specializes in managing inventories with deep industry knowledge.

Investing in training programs improves the quality of output done by your staff reducing errors made. They should know all applicable accounting regulations regarding stocktaking protocols within your jurisdiction. Ensure that staff is well-informed about the inventory process beforehand so that there are no hiccups during the count.

“A periodic physical inventory, when compared with a perpetual inventory record, will necessarily produce some variances. These can stem from spoilage, theft or damage.” -Edward J McMillan

To conclude, conducting physical inventory taking helps businesses stay on top of their stock and better manage cash flow by reducing discrepancies in inventory records. Since it’s not easy getting accurate tallies, assigning sufficient resources for counting operations, having reliable IT systems to facilitate tracking inventory activities, investing in employee training programs, and adhering to best accounting practices are crucial considerations before embarking on this exercise.

Preparation for Physical Inventory

Assigning Roles and Responsibilities

One of the crucial steps in preparing for physical inventory is to assign roles and responsibilities. The assigned team should include staff members from different departments such as sales, purchasing, receiving, accounting, and finance.

The main duties of the inventory team should be to conduct a thorough physical count of all inventory items, identify discrepancies between physical counts and inventory records, and investigate reasons for those differences. Additionally, they may need to validate or update product information when necessary, reconcile inventory figures with financial statements, and perform other tasks depending on the company’s needs.

“A well-prepared team can significantly reduce errors and improve efficiency during physical inventory.” -Joe Goldberg, Supply Chain Management Review

Organizing and Cleaning the Inventory Area

Another important step in preparation for physical inventory is organizing and cleaning up the inventory area. This activity includes identifying damaged, expired, slow-moving, obsolete, or excess products that are not worth counting and either selling them or disposing of them properly before starting the inventory process.

The inventory area must be labeled clearly, visibly marked by aisle and shelf levels, free of clutter, sorted by item type, and organized according to the needs of the inventory team. Employees should be trained to recognize common storage mistakes such as mixing different units of measurement, storing fast-moving items behind slow-selling ones, or placing heavy items on top of light ones.

“A clean and organized work environment can make it easier to locate missing products, avoid stockouts, and mitigate safety hazards.” -Ronald Kubera, Retail TouchPoints

Preparing Counting Sheets and Tools

Preparing accurate counting sheets and tools is essential for conducting a successful physical inventory. Counting sheets must include item descriptions, unit of measure, quantity on hand, and any other relevant information that can help the inventory team locate and count the items efficiently.

The company’s inventory system should also print out or provide barcoding, RFID tagging, or scanning devices to speed up the counting process and minimize data entry errors. Other useful tools may include carts, ladders, gloves, flashlights, mirrors, and other equipment that can facilitate the inventory-taking in hard-to-reach areas or low-light conditions.

“The more accurate and comprehensive your counting sheets and tools are, the fewer discrepancies will occur during physical inventory.” -Michael Brown, TradeGecko

Notifying Staff and Customers

A final step before starting physical inventory is to notify staff and customers about the upcoming inventory schedule and its possible impact on their daily routines and operations. The notification should explain why physical inventory is necessary, how long it will take, what products will be affected, and how the company plans to manage orders, deliveries, pick-ups, and returns during the inventory period.

The notification may also serve to remind employees of the importance of proper inventory management throughout the year, including accurately recording receipts, sales, transfers, damages, and adjustments. Additionally, it may prompt customers to visit the store or website before or after the inventory period or choose alternative channels for placing orders or inquiries.

“Effective communication with stakeholders can help minimize disruptions, misunderstandings, and lost opportunities during physical inventory.” -Jason Kim, Handshake

Physical Inventory Counting Techniques

Spot Checking

Spot checking is a physical inventory counting technique in which only specific areas or items are counted. This method is often used to quickly verify the accuracy of inventory records and identify any discrepancies that may require further investigation.

This method can be useful for businesses with large inventories that would take too long to count manually, as it allows them to focus their efforts on specific areas where errors are more likely to occur.

“Spot checking is a quick and effective way to validate your inventory data without having to count everything from scratch.” -Marc Abla, CPA and Managing Partner at Blythe CPAs & Advisors

Barcode Scanning

Barcode scanning is a popular method of conducting physical inventory counts, especially for larger businesses. This technology uses handheld devices equipped with scanners that can read barcodes printed on each product or bin location to determine its identity and quantity.

Barcode scanning provides several advantages over other methods, including increased speed and accuracy, reduced labor costs, and real-time updating of inventory records. It also eliminates the need for paper-based record-keeping and manual data entry, reducing the risk of errors and improving efficiency.

“Barcode technology is fast becoming the preferred method of managing inventory because of its ease of use, reliability, and cost-effectiveness.” -Barcoding, Inc.

Manual Counting

Manual counting is the most basic method of performing physical inventory counts. This involves physically counting every item in stock by hand, recording the number on a clipboard or sheet of paper.

While this method has been largely replaced by newer technologies such as barcode scanning and RFID, it may still be appropriate for smaller businesses with simpler inventories who do not have the resources to invest in more advanced systems.

“In some cases, manual counting may be the only viable option. However, it is important to recognize its limitations and take steps to minimize errors.” -Greg Rose, Senior Director at NetSuite

Radio Frequency Identification (RFID) Technology

RFID technology uses radio waves to automatically identify and track objects equipped with RFID tags or labels. These tags contain a unique identifier that can be used to determine the item’s identity and quantity without direct contact or line of sight.

This technology provides several advantages over other methods, including increased speed and accuracy, reduced labor costs, automated record-keeping, and real-time tracking capabilities. It can also be integrated into existing inventory management software for seamless data integration.

“RFID technology is revolutionizing the way businesses manage their inventory, providing unprecedented visibility into their supply chain and enabling them to make better decisions based on real-time data.” -Zebra Technologies

When Is Physical Inventory Usually Taken?

The optimal time to conduct physical inventory counts varies depending on each business’s specific circumstances. Some common times are:

• End of the fiscal year: Many businesses prefer to conduct physical inventories at the end of their fiscal year to accurately determine their financial position and report their results to shareholders or tax authorities.
• Quarterly or monthly: Some businesses choose to perform physical inventory counts at regular intervals throughout the year to quickly spot any discrepancies and keep their records up-to-date.
• During slower seasons: For retail businesses, conducting physical inventories during slower periods such as after the holidays or before new products arrive can help minimize disruption to regular operations.

Regardless of the timing, it is essential to plan and prepare carefully to ensure a successful inventory count. This includes verifying the accuracy of inventory records, organizing and labeling items for easy counting, and communicating expectations and procedures clearly to all employees.

“Conducting physical inventory counts is an important part of managing your business’s assets. Taking the time to plan ahead and implement best practices can help reduce errors, save time, and improve overall efficiency.” -Small Business Administration

What Happens After Physical Inventory is Completed?

When is physical inventory usually taken? When a business or organization needs to get an accurate count of its merchandise, raw materials, and other inventory. However, taking stock only marks the first step in managing inventory. After the process is complete, there are a number of post-inventory tasks that must be performed.

Reconciling Inventory Discrepancies

The results provided by the physical inventory may not match up with the records kept by the business. This could occur for many reasons, such as theft or mistakes during counting. It’s the responsibility of the management team to identify these discrepancies and determine their causes. The outcome of this investigation then determines the next steps a company takes. In some cases, adjustments to inventory levels may be required if stock has been lost or stolen. Depending on severity, any internal control weaknesses identified in conducting a reconciliation should also receive appropriate attention from management.

Updating Inventory Records

Once all discrepancies have been resolved, inventory quantities can be updated in the company’s database. This will let managers look up current stock levels at any time without having to perform another physical inventory count. The information recorded must include proper names for each product item (SKU), quantity, purchase/received date, costs, selling price, expiration dates (where applicable) among others. Many companies use inventory management software to keep track of these details efficiently..

Adjusting Accounting and Financial Statements

The next task after reconciliation of accounts and updating quantities can be modifying accounting ledgers and financial statements. These documents document every aspect related to finance such as profits, cash flow, and assets owned by the company. If inventory reconciliations uncovered significant issues, translating those into changes in financial reporting becomes important so that the company’s reporting remains accurate.

Developing Inventory Improvement Strategies

A part of managing inventory involves fine-tuning, updating, and revisiting processes for continuous improvement. Based on the analysis of data gathered during the physical inventory process, should management identify areas where improvements could be made in reducing discrepancies or increasing efficiency, it is vital to create and implement a plan of action. These strategies can include everything from employee training on better processes for tracking stock levels, implementing security measures to reduce shrinkage. As stated earlier, businesses often use software tools to help manage the flow of products across warehouses and retail locations in real-time, alerting managers when supplies are running low or out of stock. The post-inventory period presents an excellent opportunity for managers and owners to take a deeper dive into this software’s functionalities with a view to amending some features that they have identified for improved accuracy and efficiencies based on their recently completed count exercise.

“Inventory accuracy is critical because it affects productivity by creating time lags between departments, delays in production schedules and discrepancies in delivery commitments,”

– Ron Loch, Partner, Operations Management Expert at Axsium Group Inc.

It’s important to keep track of your inventory regularly throughout the year rather than only attempting to reconcile accounts annually. Having a strong grip on your merchandise status means there are fewer surprises and less work required to ensure books stay exact. The payback for these best practices likely comes in the form of finally unlocking stores of cash tied up in stock that previously appeared “lost” due to forgotten inventory or misplaced goods — a hidden asset worth discovering.

Frequently Asked Questions