Maintain Inventory Accuracy

Inventory is the physical supplies you sell or use to provide services as part of your business. Your inventory is one of your most valuable assets, and keeping track of it accurately is essential to running your business smoothly. Whether you use an electronic inventory tracking system or do everything yourself manually, maintaining accurate inventory records will contribute to your business’ success. Note that a discussion of inventory can refer to the tangible goods your business has on hand, or it can refer to the accounting values for inventory. This article will discuss controlling physical inventory.

Steps

Developing an Inventory Tracking Method

1. Choose an inventory monitoring method. The key to maintaining accurate inventory is having an established method of inventory tracking, and sticking to the method faithfully. There are generally two options for inventory tracking — system or manual. Inventory systems are generally software products that connect to your accounting system or cash register and update your inventory records as you make sales and buy new product. On the converse, you can also track your inventory manually by keeping an inventory log on paper or in an excel workbook, and by updating your inventory yourself periodically.
   • When deciding what form of inventory monitoring you use, consider your business needs, such as how often you need to access inventory records and what kind of inventory you own, as well as how much you can afford to spend on an inventory monitoring system.
   • If you are a small business and your inventory is not dangerous or unusually valuable, you should consider tracking your inventory manually to save costs.
   • If you run a large business or have valuable or dangerous inventory, you should consider paying to use an inventory system. Depending on what you choose to pay for, you can have as complex a system as you like, including required log-in for employees and automatic accounting updates for tax and business reporting purposes.
2. Create inventory groups and tags. Make a list of all the products or types of products you have in your inventory, and choose a name for each one. You can be as detailed as you would like, but each item in your inventory should fit into one (and only one) of these inventory groups. Include any inventory items you will need in the future or simply don’t have on hand on inventory day, and create groups for those items as well.
   • Consider your purchasing needs when creating inventory labels. For example, if you run a cafe and need to have whole, low fat, and soy milk on hand every day, don’t create one large inventory group called "milk." Instead create labels for each type of milk you need.
   • As another example, if you sell rain boots in a variety of colors, you may organize your inventory by gender and size, but not color. This will help you ensure you always have boots available in everyone’s sizes, but won’t waste time needlessly tracking color.
   • Remember that inventory is only things you use up providing your service, like coffee in a coffee shop and clothing in a boutique. Things like a coffee grinder or a dressing room chair are equipment, not inventory. You will likely need to keep track of your equipment as well as your inventory, but your groups should only be for items you will sell or use and need to replace as part of your regular business.
3. Count your inventory. Dedicate as much time as you need to perform an initial count of how many items you currently have in each group. Separate your inventory into the groups you decided on, and mark each group once you have counted it. If your inventory is especially valuable, complex, or dangerous, you might count it twice to ensure accuracy. You may need to involve your employees if you have a large business and a lot of inventory.
   • Physical inventory counts should be performed regularly to validate automated inventory counts. These counts allow you to identify discrepancies due to theft, spoilage, or obsolescence.
   • Use visual cues to make inventory counting easier. For example, use bright yellow paper to record the number of items in each inventory group. Once you have counted a group, tape the paper with the count to the group, making clear you have already counted that group.
   • If your supplies come in larger packages, like boxes filled with 10 rolls of tape each, it’s fine to just count the number of boxes you have of that supply and multiply that by 10 to get your total.
   • If you run a restaurant, bar, coffee shop, or any other kind of business where you sell food, counting inventory can be especially challenging. A common method for measuring alcohol is to measure the fullness of the bottle in increments of one tenth, and record accordingly. You can apply this same concept to other food and beverage items, using measurements that fit your business purchasing needs. You may wish to measure items by weight or by unit, for instance.
4. Record your inventory count. If you are going to track inventory manually, use a notebook as an inventory log, or create an excel spreadsheet. Create a row for each group in your system, and then write the quantity in that group from your count. If you are using an inventory system, the system will guide you through creating labels for each group and recording the quantity on hand for each of these groups.

Implementing Your Inventory Tracking Method

1. Schedule your inventory updates. To maintain accurate inventory records after you have performed your original count, you need to implement procedures to add new inventory when you make purchases and reduce inventory when you make sales. If you are tracking inventory manually, choose how often you will count your entire inventory and update your records. You should do this at least once each year, but depending on the type of inventory you hold, you may want to count and update your inventory as often as once a week or once a month. If you are using an electronic inventory system, you will likely have the option of connecting your system to your cash register, and using continuous inventory recording.
   • If you are tracking inventory manually you can choose whether or not to update your inventory records when you purchase new inventory, or just to count all your inventory at regular intervals and make updates then. Whether or not you update for purchases, you should perform regular counts.
   • If you have a lot of inventory and counting it all regularly is unrealistic, cycle counts are the solution. Cycle counts are counts of individual inventory groups, so you don’t count everything, but as part of your cycle count plan, you are always rotating through your groups and counting a few of them each time. This can be an effective way to maintain accurate inventory records without constantly counting everything you own.
2. Make periodic inventory adjustments. Each time you perform a count, adjust your recorded inventory levels to reflect the current volume. If you use a manual system, update each item in your inventory with the current quantity you have on hand. If you use an electronic system, it will likely guide you through the steps of performing adjustments, but you will do the same function of increasing or reducing the inventory level for each of your items, based on your counting.
   • This is also a good time to monitor your inventory usage for reasonableness. If your inventory level is a lot lower than you expected, why is that? Consider whether you are losing inventory to theft, or if your operations require more supplies than you expected.
   • Remember that not all inventory loss is from theft. You may also lose inventory due to damage or defect, so a nominal amount of loss is expected. Loss of inventory due to theft, damage, defect, etc. is called shrinkage, and you should aim to minimize shrinkage while still allowing for reasonable error.

Establishing Inventory Controls

1. Determine your inventory control needs. If you have employees, you may want to secure your inventory against theft or misuse. The level of control you establish should be based on the value and risk associated with your inventory. If your inventory includes prescription medication, ammunition, or other dangerous goods, you should develop strong controls. If your inventory is food, beverage, or other low cost items, your controls can be less stringent because your inventory isn’t as risky. Remember that it is possible to over-control your inventory — the more complex your controls are, the higher the cost of labor associated with performing them will be. Your controls should reflect your business needs.
2. Separate your inventory from business activity. By storing your inventory in a separate place from where you do business, you ensure that it isn’t readily available or visible at all times. For example, you may have a large fridge and freezer in the back part of your coffee shop, and employees may bring milk from that fridge to the bar when they need to. Having a separate storage area can make it easier to keep track of your inventory.
3. Restrict access to your inventory storage area. This can be as simple as having an "employees only" sign outside your inventory storage room, or as complex as requiring a key or employee badge to get in. The level of restricted access to your inventory should reflect the risks associated with the items you have on hand. Many inventory systems for sale provide restricted access by requiring a passwords or badge swipes to a access a locked inventory storage room.
4. Record inventory usage. You can require employees to log when they take an item out of inventory for use in your business. A simple form of recording is a check-out sheet, so employees write down their name, the date, and the amount of inventory they remove. A more complex form of recorded inventory use is computer access system, where employees must log in with their unique ID and scan each inventory item they pull.
   • Recording is especially important when your inventory is dangerous or high value. Keeping a log of when things were removed can reduce theft and makes sure you have a record of who took what when.
5. Perform inventory audits and cycle counts. If you use an inventory system that automatically updates your inventory volume each time you make a sale, you can conduct random inventory audits and compare the count at audit to the amount recorded in your inventory system. Periodic physical counts are necessary to assure that accounting records and physical inventory agree. To be effective you don’t need to audit each and every inventory group, you can just choose a few different groups to audit each time. Note items that are consistently under during audit, and consider further restricting access to these items.
6. Establish inventory system controls. Whatever you use to record your inventory levels should be controlled, to prevent anyone from wrongfully or accidentally changing your records. If you use an electronic inventory system, make sure you set up a secure username and password that only you know. Provide other employees who access the system unique login information. If you use an excel spreadsheet to keep track of inventory, store the spreadsheet on a secure computer that only you have access to. Similarly, if you use a notebook, keep that notebook in a secure place. This will prevent employees from stealing inventory and then changing your inventory records to cover up the theft.
7. Walk the talk. If your employees know you are serious about inventory accuracy and will investigate discrepancies, they will be more likely to take your system seriously and follow it. To make this clear, provide adequate training to all your employees on your inventory system, and hold your employees accountable for following these instructions. Inform employees about the controls you have over inventory and tell them you plan to monitor inventory levels for theft and misuse. Above all, take inventory accuracy seriously yourself. The worst thing you can do is model for employees a casual attitude regarding your inventory — if you don’t take it seriously, they certainly won’t.

Restocking Your Inventory

1. Plan your purchasing cycle. One of the greatest benefits of having an accurate inventory system is that you can plan your purchases accordingly, so you don't have to store more inventory than you need. Determine how much of each product group you need for each business day, and then decide how often you will restock (weekly, monthly, etc.). Multiply the daily needed product quantity by the length between your shopping trips, and add two to five extra days for increased demand. This is how much of the product you need on hand after a purchase — it is enough to meet your business needs until your next purchase, plus a little extra (generally two to five days). To determine how much you need to purchase each time you restock, you need to know how much of the product you currently have on hand, and subtract that amount from your desired quantity.
   • The greater the fluctuation in demand for your products, the more extra product you should have in addition to what you need to run your business.
   • When deciding on inventory levels, you should also consider the difficulty of getting more product if you run out ahead of schedule. If you are a coffee shop and you are ordering low, it's not difficult to run out and buy a few extra gallons of milk. On the other hand, if you are a dentist ordering your supply of nitrous oxide, you might want to keep more spare product on hand, as running out would present a greater problem.
   • As an example, imagine that as a hair dresser, you generally use one bottle of shampoo a day, and you would like to restock only once a month. That means after restock you want to have 33 bottles of shampoo (31 for each day of the month, and two extra). When it's time to order new shampoo, you still have seven bottles of shampoo remaining. You subtract seven from 33, and order 26 bottles of shampoo.
2. Seek opportunities to automate. If you've invested in an inventory management system, there are many features that you can use to manage your purchasing as well. If you don't want to make bulk purchasing trips, and instead order from multiple vendors who deliver to you, you can program your inventory system to alert you whenever you reach a low quantity in a specific group. Some systems will even order inventory for you, just based on the level of supply you have on hand. This method is more expensive than manual inventory and purchasing, but in a large business with lots of inventory, it can save a significant amount of time and headache.
   • Like in the shampoo example above, if you have an automated inventory system where you scan each bottle as you bring it out of storage, your system may allow you to automate restock purchases of shampoo. You program the system to order 30 new shampoo bottles from your vendor whenever you get down to five bottles in inventory.
   • Even if you don't automate purchases, your inventory system can likely alert you when your product is running out. You can use these reminders to know when to place manual orders, instead of always placing them at specific intervals.
3. Adjust your purchasing based on your experience. As you run your business over time, you will get more and more accurate at predicting your inventory needs. If you regularly notice you have a lot of product on hand when you go to make purchases, reduce your necessary inventory level. You only want to have a slight amount more than you need, because you pay for the storage and potential waste costs of your unused inventory.

Tips

• Integrate your inventory labels into your storage system. For example, if you count your clothing inventory by clothing size, store the clothing in the same way you would count it, with one location for mens size small, another for mens size medium, and so on. Label the storage locations by group name to make storage clear and simple. This will speed also speed up counting when that time comes.
• Use your inventory records for accounting and tax purposes. By multiplying each item’s purchase or sale price, you can calculate the value of your inventory.

Related Articles

• Account for Stolen Inventory
• Develop an Inventory System
• Control Inventory
• Adjust Inventory in QuickBooks

Sources and Citations

See also

• Calculate an Early Payment Discount
• Make a Balance Sheet for Accounting
• Become an Accountant
• Process Payroll
• Learn Business Accounting
• Create a Revocable Trust
• Pay Commissions to Your Sales Staff
• Account For Accumulated Depreciation
• Understand Debits and Credits
• Liquidate Assets

Read more ...

What links here

• Account for Goodwill
• Account for Stolen Inventory
• Calculate Capital Gains