Procedures for an Effective Physical Inventory

The most important element to a successful and accurate physical inventory is proper planning and preparation. Written procedures that are understood by all involved is a good first step that will help to assure a well controlled and disciplined count and allow you to focus on an accurate count which will be more efficient and take less time. The more time you spend on the preparation of a count, the less time it will take to perform the count and the more likely you will have an accurate count and minimize re-counts. An inaccurate physical affects at least two years!

Preparing for a Physical Inventory

Schedule the Count Date(s)

Set the count date well in advance so everyone has time to prepare for it and schedule around it. Avoid busy seasonal times and times when your team may not be available or will be preoccupied and less likely to be focused on the task at hand. If you have multiple stores or stock locations, multiple dates can be selected. Often this is preferable, especially as it allows your management staff to be available for supervision.

Human Resource Considerations

While you must consider the availability and experience of your staff, you must also consider the importance of checks and balances and personal accountability. If internal theft is a problem, you can’t depend on a completely accurate count; it’s like letting the fox guard the hen house. Where ever possible, you should rotate your staff to areas for which they don’t have direct responsibility. Swapping store personnel to other stores is ideal for multiple store locations. Even where this isn’t practical, consideration should be made to separating close friends on separate teams if collusion is a possibility.

Of course, third party inventory services provide an alternate resource. They have an advantage of being independent and have no tracks to cover. On the other hand, they do not know the merchandise and physical stock locations as well as your own staff. Third party services are usually most effective when they work closely with your staff. For example, the service can take detailed counts and your staff can perform verification counts to double check their work.

Select Your Counting Method(s)

There are various methods for counting. The best method depends in part on how merchandise is managed and how your stores or stock locations are laid out.

  • Computer Generated Count Sheets – Computer Generated Count Sheets are preprinted lists of inventory generated by your software that can be used to record your on hand counts. The biggest problem with count sheets is that no matter how they are sequenced they won’t follow a logical flow of how goods are merchandised or even stocked. Furthermore, if merchandise is on hand that isn’t included on the count sheet it is quite easy to miss altogether. As opposed to following a wall to wall fixture map, count sheets make it nearly impossible to assure that all merchandise is counted. If they are used in conjunction with a wall to wall count, too much time will be wasted paging back and forth to find the associated items to record counts.However, count sheets can be useful when performing narrow spot inventories, especially cycle counts. Count Sheets can also be useful when counting back stock or warehouse locations where product organization is very controlled.
  • Manual Count Sheets – Manual Count Sheets are merely ruled forms that allow you to record the product id, quantity and, if needed, retail of merchandise being counted. Unlike Count Sheets that pre-determine the merchandise listed, this manual method can be effective for wall to wall counts.When this method is used, count teams should be used: one person to call out the classes or SKUs, prices and counts while the other records them. When assigning teams this allows you to pair more experienced people as counters with less experienced people to record the inventory. This also helps less experienced people learn the inventory.Manual count slips are quite effective when merchandise is controlled by classification as retail prices need to be recorded. However, when SKUs are used, it is very easy to mis-record or transpose numbers, even when relatively short SKUs are being used (6-7 digits). The other disadvantage of count slips is the cost of time and potential for errors as slip counts must be manually extended and totaled.Manual count slips should be pre-numbered so you can verify they were all retrieved after the counting and verification is completed.
  • Portable Inventory Devices – Portable Inventory Scanners can be the most efficient method for taking an inventory, especially when barcodes are used on the merchandise. They eliminate the need for a two person count team, though all detail counts should still be verified. While portable scanners are most efficient when all inventory is bar-coded and controlled at the class level, some portable scanners can allow for the entry of class level (open merchandise) items by allowing for the entry of prices.The major drawback to portable devices is the initial investment in the devices as you need enough to allow for complete counting in a short time period. However, the long term return justifies the investment in terms of efficiency and accuracy. Costs can also be defrayed by renting units or sharing them with other retailers taking counts at different times.Keep in mind that a wireless laptop with a scanner on a rolling stand is in itself a portable inventory device. However, we caution against using a fixed location PC for this purpose if it requires you to bring inventory to the device. The last thing that should be done while counting is to move merchandise.
  • Inventory Services – Several third party companies specialize in taking physical counts. Their advantage is that they are inventory specialists and are impartial. If you suspect internal theft, their impartiality can be critical. Their expense can offset against overtime wages and the costs of portable scanners.The disadvantage of an inventory service is that they are not knowledgeable about your merchandise, inventory practices and stock locations. The other concern with Inventory services is often the lack of quality and professionalism of the count teams; after all we all know how unpleasant physical counts can be, even when it is our own merchandise.However, these disadvantages can be overcome through proper preparation and assuring that your staff oversees the counting process. We believe that the biggest problems retailers have with inventory counting services are rooted in setting unrealistic expectations. An inventory service can not, and should not, be expected to replace a retailer’s responsibility for planning, preparing for, auditing, and ultimately being responsible for their own counting. The most successful counts will always be those that were properly prepared for and properly overseen and audited. Combining an independent external service with the proper oversight can provide the best and most objective results.Perhaps the best solution for disciplined, accurate and independent counts is to create your own personal counting service. By coupling your senior and management team who knows the inventory with close friends, family and other stake holders you can achieve consistent results even though the act of counting is less than fun. It’s just like moving – you’ll find out who your real friends are, but you’ll have fun doing it!
Keep in mind that the best solution for your store might be a combination of the aforementioned methods.

Create a Fixture Map

A fixture map is a physical layout of the store and all stock locations. Each fixture, display, rack, and back stock location should be assigned a Fixture Map code that relates to a slip code that will be used for counting. If either computer generated count sheets or manual count sheets are used, the form number(s) are recorded on the fixture map as the sheets are distributed. If a count sheet is missing later you know where to look.

This provides a critical road map to a well planned wall-to-wall inventory that assures all products are counted. You can quickly identify when sections of your inventory are missed. Additionally, it provides an excellent tool to enable verification counts to be compared against detail counts. Verification counts are merely total piece counts of each fixture/slip that can be compared to the detail counts recorded. When verification counts don’t match detail counts a recount can then be taken for only the specific slip/fixture location.

Don’t forget back stock locations as well as other “in process” locations such as customer holds, alterations, off site approvals, and even the manager’s trunk or delivery vehicles.

Furthermore, specific slips/fixture locations can be assigned to counters and verifiers to measure the accuracy and efficiency of your personnel. Simply announcing that productivity will be measured, let alone establishing incentives, will go a long way to assuring accurate counts.

When assigning Fixture Map/Slip Codes be sure that your code can be used by your counting device, software and/or counting service. For example, if your portable device only accepts numeric codes, don’t use alpha numeric codes.

Prepare/Order Supplies & Test Procedures

Make sure count slips, physical scanners, and borrowed or rented scanning devices are all ordered and scheduled. Make sure you have either a fresh supply of batteries or have recharged rechargeable batteries for your scanners.

Make sure portable devices are tested and that you can upload the data in a format readable by your software. Make sure all prior counts have been deleted from memory and retest the download process to make sure prior counts don’t get mixed in with new counts. Refresh your memory of procedures: the last thing you want to do at the end of a long day counting is to inadvertently delete data from a reader before it is captured and confirmed!

Visit Your Inventory

Prior to counting inventory it is important to reacquaint yourself with it. Go through each display and ensure that inventory isn’t misplaced, damaged or obsolete, and make sure all merchandise is tagged. Not only will this save time during the counting process, but it will provide an opportunity to clean up, re-steam, and markdown, or even return aged or damaged inventory.

When counting your inventory your focus should be solely on an accurate count. In preparation for an inventory not only will it be more organized but it will offer the opportunity to carefully review it for age, damage or other presentation issues that prevent it from selling.

While you are at it, look behind the dressing room mirrors, under the chairs, in drawers, behind displays and other discreet locations that may contain merchandise tags ripped off of goods by thieves. While these goods won’t be counted, the tags can be useful in pinpointing the source of shrinkage. It’s also a great opportunity to dust and clean those hidden corners and crevices. While you are at it, look around, under, and inside your cash drawers for missing checks or currency. Take it from someone who has replaced thousands of point of sale systems – I always find dust and usually tender! Dusting around your computers and other electronic equipment will extend their lives and save you money. Cleaning electronics during a physical should be as automatic as checking smoke detectors and extinguishers when you reset the clocks!

Complete store physical inventory counts usually (they should) occur immediately after a seasonal sale. Depending on the method used for recording markdowns, consideration may need to be given to the price recorded on unsold merchandise. This is usually a lesser problem when taking cycle counts.

Back Stock and out-of-season merchandise

If you have back stock or out-of-season merchandise that is set aside you not only can clean up the merchandise but also consider counting it early if you know it won’t be moved, needed or sold before the physical count. Better yet, out of season or obsolete merchandise can be given it to a worthy charity. Rather than collecting dust as back stock it be put to use, won’t cost you money to count and may give you a tax break.

In Process Inventory

One of the most difficult and easily overlooked areas to getting a good count are those in-process locations such as:

  • Alterations
  • Layaway Stock
  • Approvals
  • Holds
  • Merchandise out for repairs
  • Sales orders awaiting backordered merchandise for fulfillment
  • Merchandise being held for return-to-vendors

First and foremost, you must be sure to understand how you are treating each in-process inventory area. Are goods considered to be sold ? If so they aren’t in inventory, and if not, they must be counted.

Prior to a physical count it is imperative that you first know whether such goods need to be included in the count or not. However, in preparation it is an ideal time to audit the details of such locations. Is there merchandise out on approval that hasn’t either been returned or billed? Are your layaways current and up-to-date? How long has merchandise been awaiting a return authorization from a vendor?

Clean Up Returns

Returns awaiting RMA’s should be thoroughly reviewed. Contact as many vendors as possible to get the needed Return Authorizations so goods can be returned and removed from inventory. (Frankly, returns should be removed from inventory and charged back to vendor accounts payable when the RTV is first created – in which case they shouldn’t be counted) Any goods remaining will need to be counted (unless they have been taken out of inventory) and in many cases you will need to create merchandise tags so the goods are properly identified when counted. The day of the count is not when you want to be trying to figure out what the goods are and researching old invoices to determine the product codes and last retail.

Catch Up on Vendor Invoices

All invoices that have been received should be reconciled to receipts and be posted so any adjustments to inventory are accounted for before the inventory. Receivers that haven’t been matched to invoices (accrued A/P) should be reconciled. Prior to a physical inventory count is a good time to clean up these open accruals and even contact vendors for missing invoices.

Inter-store Transfers

It is imperative that the staff that will be counting the merchandise understand the importance of an accurate count. They should understand that while the process is tedious it has much more important ramifications that just closing the year and reporting to the IRS. Counting and verification procedures should be reviewed as well and how specific merchandise and exceptions are to be handled.

Taking Counts


Freeze Transactions

Before the count begins, and until the initial count audit, all inventory transactions and movements should cease. Physical counts should only occur when the store is closed so sales aren’t occurring and inventory isn’t being moved for customers or vendors.

All receiving, returns, and transfers need to be cut off. It is especially important in these areas to have a careful cutoff in that you must know what inventory has or hasn’t been recorded in the system. New shipments received should be frozen and seals shouldn’t be broken. Anything that has been opened should be received in. All receipts should be posted to inventory.

Depending on how merchandise is moved between stores, inter-store transfers should be cut off a week before the physical for each store. A day or two might be enough if you use your own delivery vehicles, but a week or more might be required if you are using a common carrier to make sure all goods get delivered and properly counted. Reconciling transfers in and out before and after a physical count provides extra assurance that all goods have been counted correctly.

Allow yourself plenty of time

For an inventory count to be accurate it must be deliberate. Be sure to schedule enough people and enough time to take the count and complete the count audits. Frequent and required breaks should be considered to make sure everyone stays fresh and alert. In fact, rotating teams can be ideal so no one person is overwhelmed or overly relied on for results.

Do not move inventory while counting

The time to organize and clean up the inventory is before the physical counting begins. During the count is not the time to move around misplaced inventory. The risk of not counting or double counting it is too great.

The job isn’t complete without verification counts and audit

It is important that preliminary audits be performed as goods are counted. Simple verification counts of the total number of pieces per fixture/slip can be easily achieved and allow you to recount slips with discrepancies and make sure entire sections haven’t been missed. Everyone on your counting team should understand that the task is not complete until these basic audit steps have been taken. If the detail count and verification count (the total piece count) doesn’t match, retake the verification count to assure it is right; once the total piece count is confirmed the detailed slip/fixture should be recounted until the total piece counts balance.

You should also verify your fixture map. Once all fixtures have been counted with completion slips attached, walk though your store and make sure no merchandise has been missed. Areas to consider include the following:

  •  Display windows
  • In store displays
  • All stock locations
  • In transit locations such as delivery trucks and managers’ cars
  • Customer hold merchandise
  • Layaways unless they are recorded as sales
  • Merchandise out on approval with customers
  • Alteration department for unsold items

Deeper research into discrepancies can always be completed at a later date – in fact several weeks or months later, but the only time a physical count can be accurately verified is at the time all movement is frozen.

A well planned and organized physical count is the basis of determining and analyzing shrinkage. Without a reliable physical count, analysis of the results will be unproductive.

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Written by

Tim Smyth is the President of Smyth Retail Systems. From small shops to Wal*Mart, Tim has helped thousands of retailers all around the world with their automation needs.

3 Responses to "Procedures for an Effective Physical Inventory"

  1. Tushar says:

    Dear Tim,

    I sincerely thank you for posting a very comprehensive stock counting process in a retail store. I am in this industry for quite some time. I have experienced the kind of chaos takes place during stock count process. I am sure this will immensely helpful for the one who take up inventory verification project in a retail chain. Thanks


    • josphat says:

      thanks for this contribution on this issue. i have been employed in a megastore for the last four years as a stock supervisor and through proper planning and preparation have managed to do 90% audit on all our products


    Hi Tim,

    Thank you for posting “Procedures for an Effective Physical Inventory” on your blog.. Lately I have been doing research to start a Physical Inventory taking Service Business and this article has helped me understand a few important concepts.

    Wanted to ask you if you can point me out to a few links where I can learn about software and hardware required to do physical inventory counting. I am working on a business model in which I would offer physical inventory counting service to small retailers and distributors.

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