Physical inventory procedures

2. Physical inventory planning and preparation

As we mentioned, a physical inventory may be a time- and resources consuming procedure, which requires proper planning. The planning helps you to make your annual inventory count more effective. You should have a written policy regarding the inventory count process (inventory plan, inventory instructions). In this policy you determine a date of conducting the physical inventory, assign responsible persons and describe the methods to be used. You can use different approaches (full inventory count or cycle count) to count different types of inventory; for example, one method for finished goods, and another method for work-in-process (WIP) or for raw materials. You also should publish the procedures and policies regarding recording the counts, reconciling discrepancies, unknown items, emergency or rush shipments, and auditor's approval requirements. Establishment and documentation of counting procedures will allow you to control and supervise physical inventory properly.

It is beneficial to plan and prepare a physical inventory in advance:

  • First, you should determine a date and time of conducting a physical inventory and inform your employees about it. Maybe your inventory counting will take place on different days in case you have several remote warehouses. Select a day when your company activities are at a low point.
  • Second, you should form a counting team(s). At this stage, pay attention to employees' experience and understanding of a physical inventory process. Let the experienced people make all counts and necessary calculations and less experienced record the results of counting. Some training about material types, counting methods, documentation will be also useful.
  • Third, choose the method of conducting a physical inventory. You should use the information in the following table and decide which method is suitable for your company.

    Illustration 1: Methods of counting inventories





    Bar-code readers

    Use of bar-code readers allows reading and recording the counts directly to a computer.

    The most efficient method.

    Makes the physical inventory process more simple and accurate. Counters can quickly read and record information. Reduces human error; eliminates counting in teams; minimizes shutdown time.

    Expensive; special computer software and bar-code labels are required.

    Count cards / tags

    Index cards with information about individual product and location are used during counting.

    Not so expensive as bar-code readers; help discover lost and misplaced material.

    More advance preparation is needed (all cards must be in the warehouse before the count begins).

    Count sheets

    Pre-printed lists of inventory (usually generated by company's software) are used to record on hand counts.

    The easiest and cheapest method.

    More time consuming (searching, counting, comparing). No logical order of items in count sheets.

    A lot of time spent to find particular item during "wall to wall" counts. Items which are not in the listing or not in their place could be missed.

    It is important to ensure that all transactions (receipts, customer returns, adjustments, etc.) have been recorded before you prepare and print count cards or sheets for physical inventory. Any rush transactions could be entered or processed only after the completion of physical inventory. When you generate count sheets and cards, leave spaces for names and signatures of the counting team members for future accountability and tracking.

  • You should also prepare the warehouse(s). Make sure that all materials/products are in their proper places and can be clearly identified, clean up the store area, label all shelves and locations. Slow-moving items can be counted and marked a day before a full physical inventory. Identify damaged, discounted and obsolete classes of items; place them separately from other inventory (vendor return area). Prepare and provide the plan(s) of stock locations.

If you spend enough time on the preparation of a count and explanation of the importance of physical inventory to involved personnel, you will perform the count quicker and will have an accurate count with minimum re-counts.

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