What is a Physical Inventory?
Physical inventory also refers to the stock available for purchase. This includes the process of counting items and weighing or measuring them, and ordering the costly items from vendors.
What is a Physical Inventory Count?
A physical inventory count is when store employees count the actual inventory in the store and compare these levels with the inventory levels recorded in the Point of Sale (POS) system. This ensures accurate inventory recording, identifies discrepancies, and reduces the chances of stockouts or overstocking.
The Purpose of Physical Inventory Counting
Physical inventory counting is a process of checking the inventory you have in the store – from the sales floor to the back storage room – and comparing the counted inventory levels with the inventory levels recorded in your Point of Sale (POS) system, then reconciling any discrepancies.
Typically, inventory counting also takes into account the quantity of stock you have for each type of product.
Physical inventory counting can also include:
- Raw materials
- Manufactured products
- Produced goods
- Packaging materials
- Maintenance, Repair, and Operations (MRO) supplies
The goal of physical inventory counting is to review the stock levels in the store and ensure that the inventory numbers recorded in your POS system are accurate to 100% as much as possible. Shrinkage rate is a measure of the accuracy of your inventory levels, representing the percentage of stock lost from your POS records.
When Should Physical Inventory Counting Be Done?
It’s good practice to perform a small inventory count when restocking inventory. Ensure that the total count of items (both new and existing) is accurate to serve as a baseline against which future inventory checks can be compared.
From there, the frequency of physical inventory counting depends on several factors, including:
- The number of different items in your inventory
- The number of items sold daily
- The type of physical inventory counting method you use
- Whether you use inventory technology like POS systems or barcode scanners
For example, if you own a small clothing store with 120 different types of products, there may not be many items to count, and it likely won’t take much time. Therefore, it would be reasonable to conduct a complete inventory count every month.
On the other hand, a large retailer that sells thousands of items daily might need to increase the frequency of actual inventory checks but could define several intervals of inventory (known as cycle counting or partial inventory counting) to make the process quicker.
In addition to partial inventory counting, it is recommended that retailers conduct a complete physical inventory count at least once near the end of each calendar year. This ensures you have an accurate inventory record when preparing your financial statements for tax season.
Types of Physical Inventory Counting
Manual Counting
Manual counting is exactly what it sounds like. Store employees will count every piece of stock either in the storeroom or on the sales floor and record the numbers using pen and paper. Most stores avoid this technique because it is time-consuming and prone to human error.
Electronic Counting
With electronic physical inventory counting, store employees use a barcode scanner and POS system to count inventory more quickly and accurately than is possible with manual counting. When a store employee scans each item, the inventory level for that unit is automatically recorded in the electronic system. This not only reduces the risk of over-counting or under-counting but also provides a digital record of every inventory count, which can be compared to the inventory levels listed in the POS system for faster reconciliation.
Cycle Counting
Cycle counting is…
The cycle count (also known as partial inventory counting) is an inventory management technique where retailers count the inventory for only a specific category of products instead of doing a complete inventory count. This technique is ideal for retailers looking to maintain an accurate inventory record while reducing the time it takes to count by breaking the large task into several smaller tasks. Unlike a full inventory count, which may require retail teams to close the store or work overnight to complete, cycle counting can usually be done during business hours.
Full Inventory Count
A full inventory count typically occurs at the end of the calendar year, after the peak retail season, when inventory levels are usually at their lowest. Sales teams count all the inventory in the store and start the new year with an accurate record that includes total cost of goods sold and retail value of the merchandise.
Depending on the number of items your store carries, a full inventory count can be very time-consuming. Retailers often close their stores to conduct a full inventory count or schedule a team to work overnight. As a result, many small retailers limit their full inventory counts to once or twice a year, relying on cycle counting during other periods.
What is the difference between physical inventory count and perpetual inventory?
Physical inventory is a method of counting actual inventory done manually by store employees, who then adjust their inventory management system if discrepancies are found.
On the other hand, perpetual inventory occurs when inventory levels are updated after your point of sale system processes a transaction and automatically adjusts the inventory levels for sold items.
For example, if you have five specific products in stock and one is sold at your service desk, your point of sale system will automatically update the recorded inventory levels for that product to four. This operation streamlines the inventory management process and makes stock control more efficient.
Benefits of having a physical inventory counting process
Maintaining Inventory Accuracy
Inaccurate inventory – whether in terms of total quantity or stock levels for each size – creates significant problems for retailers.
“The physical inventory counting process is a necessary step in inventory management because it reconciles the actual inventory on hand with the inventory count in the system,” says Stephen Light, CEO and co-founder of the mattress brand Nolah. “If there is a discrepancy, that indicates a problem. It could be either inventory loss or inventory not being sent to the point of sale.”
Improving Demand Forecasting
Demand forecasting is a key component of inventory management. It involves predicting the amount of demand for a product, how quickly it will sell out, and when it will need to be restocked.
Conducting physical inventory counts also helps improve stock and purchasing forecasts. For example, retailers using the Shopify point of sale system can view demand forecasting reports that recommend products to restock based on their profitability and restock rate. This allows you to restock items not only based on their popularity but also on their profitability.
Avoiding Stockouts
“Sorry, this product is not available” is something retail employees do not want to say to potential customers. According to a recent study, an out-of-stock product was a major reason for a customer’s decision to leave the store without purchasing anything. These stockouts negatively affect retail sales.
Best Price Nutrition has 23 stores in addition to a few e-commerce sites on Shopify. With inventory distributed this way, the company’s e-commerce manager, John Frigo, says, “They forget to do transfers, so inventory is always a challenge.”
They do
I conduct a physical inventory count four times a year and perform random partial inspections of the inventory on designated brands and the products listed in the pile approximately once a month.
In addition to counting, Shopify merchants can manage stockouts using reorder points and low stock reports. With low stock reports, merchants can see the products and variants that are approaching the pre-defined reorder level and order more inventory before they run out.
Increasing the sell-through rate of struggling inventory
The physical inventory count process not only prevents stockouts but also reduces the risks of holding unpopular inventory at full price for an extended period. Using the Shopify point of sale system, merchants can access inventory classification reports that rank products based on their cost per unit, selling price, number of units sold, and total revenue generated over a time period.
For products that are not selling as expected, merchants can consider repositioning them in the store: promoting them to increase interest, or applying a special discount to stimulate purchases. This helps increase the sell-through rate of struggling inventory to ensure a return on the initial investment and to make space for more popular items that sell at higher volumes or margins, or both.
Reducing inventory shrinkage
Inventory loss or shrinkage is a common and frustrating problem for merchants. It occurs when the actual inventory is less than the number recorded in your inventory management software.
Conducting partial inventory counts weekly, for example, can help merchants identify discrepancies between the actual store inventory and the recorded inventory levels in their POS system, using a smaller sample size of the inventory that can be counted (a specific product category, for instance). Doing this weekly allows enough time to determine the cause of inventory shrinkage and reconcile it.
On the other hand, continuous inventory tracking will not confirm lost inventory. If employees steal inventory or items are stolen, your actual inventory will decrease, but it will still be available and recorded in the POS system. Avoid overstocking or understocking.
Not tracking actual inventory levels can lead to holding excessive (or insufficient) inventory, which can cause budgeting issues.
As of April 2023, the U.S. Census Bureau found that retail stores, on average, hold $1.39 of inventory for every dollar in sales.
The difference between actual inventory and demand for that inventory (also known as overstocking) can lead to price reductions. While markdowns have their uses, widespread markdowns result in revenue loss due to decreased expected margins on each sale.
With a good inventory management system and warehouse management system, you can more easily monitor inventory turnover. Through this, you can invest adequately in inventory to meet demand without overstocking or understocking.
The physical inventory counting process
1. Planning, preparation, and assigning SKUs
The inventory counting process requires accuracy and planning: Set a date to check your inventory – whether that be in a week, a month, or a specific timeframe – and give retail staff you are rescheduling advance notice. If you plan to close your store during business hours, inform customers via announcements on your social media channels, a banner on your website, and a sign in front of your store. Train new employees who have not yet participated in inventory counting on how to count items, the type of inventory check you are conducting, and where they should record their results. Prepare a list of SKUs you are counting and divide them among your staff. For example, one person can take women’s t-shirts, another can take men’s pants, and so on. This way, each staff member has a pre-determined list to follow – and nothing is counted twice.
Finally,
Before the inventory counting process, organize your stockroom and store floor, and provide each team member with enough space to count the assigned product or category without hindering each other.
2. Count Your Inventory
Whether you decide to close your store for a day or schedule night shifts for the inventory count, what matters is that there are no customers in the store buying or moving products while shopping.
During the inventory count, stock levels should not be subject to change due to sales taking place. Items should be in their designated places and ready for counting.
Ask each employee to begin checking their assigned SKUs. Explain how to record the numbers – either manually with pen and paper, using a spreadsheet, or with a barcode scanner and mobile POS system – and explain to the staff how to add notes if an item is defective, damaged, or missing a tag.
Finally, encourage each team member to look for products that are not in the appropriate place. Assign a box for miscellaneous items, where the team can sort them and check if they match the SKUs assigned for counting.
3. Analyze and Review
The final stage of the physical inventory counting process is to analyze any discrepancies between the counted inventory and the levels recorded in your POS system, determine your shrinkage rate, and estimate the value of items that weren’t counted and those that were counted in-store.
Next, attempt to find the source of any discrepancies. For example, your inventory count may indicate that you have 100 units of a flower pot, yet reports show that you ordered 95. Recount the actual inventory if necessary, and conduct some investigation to figure out what may have caused the discrepancy.
Once the analysis is complete and results are documented, reconcile stock levels to match what is in-store with what is recorded in your POS system.
Tips for Conducting a Physical Inventory Count
Leverage Inventory Management Technology
Counting items manually is not only time-consuming, but it also makes it easy to make mistakes in inventory counting and obtain inaccurate information. Additionally, conducting inventory counts across multiple business locations generates more data, which takes longer to analyze and understand compared to recording everything using inventory management software.
These issues are resolved by inventory management technology. Using a POS system like Shopify and a barcode scanner, for example, when merchants scan an item, the stock levels for that unit are automatically recorded in the POS system. This quick inventory registration provides merchants with a single source of truth for both their inventory and finances.
Apps like Stocky also notify you when inventory is low. Set reorder points for products so that when stock levels approach this threshold, you are alerted that it’s time to reorder before running out of stock.
If you want to reduce the number of inventory checks you perform annually, utilizing a POS system that supports continuous inventory management can help.
Create a Map of Your Store or Stockroom
As part of your preparations, create a map of the areas where inventory is stored – whether that’s on the floor, in the stockroom, or in the warehouse.
On the map, clearly label the location of each product category and who it was assigned to. This will help the assigned manager maintain communication with the person responsible for everything, and also assist store employees in locating items.
Additionally,
To that end, consider giving each employee a list of the SKUs they will be counting in the designated area. This can be a valuable reference point for them while scanning product barcodes and entering the counts into the point of sale system.
Labeling Boxes and Shelves
Along with your store map, label the boxes and shelves based on the products they carry – and ensure that the items inside each box are in the correct place.
These labels should reflect the map you created in the previous step. Having a T-shirt in the shoe box, for example, causes confusion. The employee counting shoes will need to stop counting shoes and put the T-shirt in the “Miscellaneous” box. Similarly, the employee counting shirts will have inaccurate information until the “Miscellaneous” box is sorted.
Treat the “Miscellaneous” box as a less accommodating way to collect everything and more as another solution. By labeling the boxes and shelves and ensuring that products are in their designated spots before the counting process, everything will stay on track and save time when the counting is done and it’s time to account for the miscellaneous items.
Clean the Counting Areas
Have you ever heard the phrase “a tidy environment is a tidy mind”? The same applies to the inventory counting process.
Make sure that each area designated for inventory counting has enough space to count large quantities of product. Eliminate items or boxes that do not belong in the inventory. Move any freestanding furniture – like mannequins or display cabinets – aside.
Using Barcode Scanners
While manually counting items is an option, it increases the chance for counting errors. Instead, opt for barcode scanners for quicker and more accurate counts.
Instead of manually counting each item and logging it in a spreadsheet or on paper, store employees scan the product’s barcode on the tag, automatically recording the inventory levels associated with that SKU in the point of sale system. Unless the store employee scans the same item twice exactly, the chances of counting errors are minimal. For retail teams working on counting large quantities of inventory, barcode scanners are essential.
Schedule a Convenient Time for Counting
The store should be closed during the actual inventory counting process. Days when you are closed to the public – like Sundays – can be an opportunity to conduct the physical inventory count. This way, you won’t have to turn away customers expecting to purchase something.
Alternatively, some retailers choose to count inventory overnight, scheduling staff to work when the store is closed. You should keep in mind that in many areas, working overnight requires compensating employees at a higher rate than you would for scheduled shifts during regular business hours.
It’s also a good idea to set a timeframe for the inventory counting process. Some stores may take a full day for a complete count while others may need a shorter period.
Source: https://www.shopify.com/retail/physical-inventory
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