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This article will explain the importance of maintaining inventory count. The explanation of this financial management tool will help you understand the importance of correctly-implemented inventory monitoring, and why this is important for the business.
What is an inventory count?
An inventory count, or inventory counting, is the physical verification of the numbers and condition of articles that are in stock which is a tool within inventory management. This is often done in order to carry out an audit on whether the technical bookkeeping stock matches the physical warehouse stock. This is often the source of information to correct stock errors.
There are various inventory count methods used for inventory management. Some companies choose to count their stock at certain times of the year, whereas other companies choose to carry out rolling stock takes (cyclic counting). An end-of-year inventory count is often used for reporting a company’s year-end figures. During end-of-year stock takes, external auditors are also present in order to test the correctness of the count.
Periodic inventory counting are often done for goods with low value. The term ‘periodic’ may mean annual, seasonal, quarterly, monthly, weekly or daily. High-value goods are often counted more frequently.
The value of the stock is part of what makes up the value of a company, and it’s therefore crucial that the value of the stock according to the inventory management system matches the physical stock in the warehouse, so that the total value of the company can be presented in a correct manner.
Why is inventory monitoring important?
As explained above, inventory monitoring can identify stock problems and shows businesses where potential problems are to be expected. Running an effective business begins, in any case, with effectively maintaining stock. Here are 6 reasons why you should regularly carry out stock takes.
1. Identifying inventory problems
Carrying out regular stock takes makes it clear if there are problems, such as damaged stock, incomplete orders, stuck orders, bad inventory management or errors in stock. The results of the stock take should be used as a basis for closer investigation of these areas. Ensuring that there are operational procedures to prevent or mitigate these situations. You should ensure that procedures have been put in place that prevent the causes of stock problems. This also applies to less common situations, so that orders don’t stay in the system for an unnecessary length of time.
2. Evaluating the performance of a product
When there are many products in a catalogue, it’s sometimes difficult to see which products make a positive contribution and which don’t. A stock take can single out products that no longer move in terms of sales. For this category of products, a strategy can be created if the solution is to remove these products from the catalogue or to change their pricing.
3. Ensuring that the company fulfills its goals
If there’s a big discrepancy between the results of the count and the bookkeeping administration, then processes are clearly not running as expected. In these situations, it’s important that they are detected as quickly as possible in order to manage them in a timely manner.
4. Improving stock ordering processes
An inventory count exposes discrepancies that you previously weren’t aware of. In these cases, one is often tempted to order more stock in order to compensate for low stock levels. This has a negative influence on a business’ ‘cash flow‘. In practice, it may often be the case that the products are actually there, but aren’t located in the right place in the warehouse.
5. Maintaining the correct pricing methodology
Nothing shines more light on financial accounting than the results of a inventory count. The results are often a good basis for reviewing the price strategy of goods that don’t generate the right profit contribution. In this case, actions should be taken to remove this kind of product from stock.
6. Making theft transparent
An undesirable, common occurrence in retail and consumer goods is that products are stolen. It may be that sensitive goods have already been stolen during transport, as a result of which stock numbers are already incorrect when the goods are received. It may also occur that personnel (often temporarily hired staff) are, unfortunately, a cause of stock going missing. In any case, carrying out a stock count makes it clear which category of products is the most sensitive.
How accurate is the inventory count result?
We’ve covered the importance of a stock count. Of course, the theme is how to carry out a stock take that gives the desired reliable information as the end result. In practice, the tool most often used for stock takes is, unfortunately, Microsoft Excel. The end result of this kind of stock take is often not as reliable as it might appear. If you want to carry out a stock take with the right level of reliability, then you should use the right software to get the desired result. Consult your accountant to make sure you’re following the correct procedures, and that your accountant or auditor are in agreement.
It’s Your Turn
Are you carrying out a inventory count within your business and creating added value via inventory management, or are you merely carrying out the wishes of your accountant? If a inventory count is carried out, is it meticulously planned ahead of time? Are external parties as well as internal departments informed? Are systems cleaned up so that there are no more open orders? Has the warehouse been physically prepared, marked, cleaned and tidied up? Is everyone properly trained, and have the procedures been explained? In other words, stock taking is a lot more than counting.
Share your experience and knowledge in the comments box below.
- Bragg, S. (2017). Inventory audit procedures. Retrieved from https://www.accountingtools.com/articles/2017/5/13/inventory-audit-procedures.
- Layton, A. (2015). 9 Common Reasons for Stocktake Discrepancies and How To Resolve Them. Retrieved from https://www.prognostore.com/blog/resolve-stocktake-discrepancies.
- Smith, H. (2015), 7 steps to a successful stocktake. Retrieved from https://www.myob.com/au/blog/7-steps-to-a-successful-stock-take/.
- Trenerry, A. (1999). Principles of internal control. UNSW Press.
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