Tips for an Accurate Physical Inventory Count

The most overlooked aspect of most Inventory Physical Counts is establishing a cut-off. Failure to do so will only create an error which will show itself again at the next physical count. A recurring variation that results in the statement “we are always making big inventory adjustments.”

So what is a good inventory cut off?

A good inventory cutoff is taking the time and performing the procedures to make sure your inventory records reflect all of the movements of inventory on the floor BEFORE you compare the on hand balances to a count. For example, you had 10 widgets this morning; at 10 a.m. you received 100 more widgets but did not have time to enter them into the system. A physical count was taken and you correctly counted 110 but the system only shows 10 because the receipt was not entered. The system makes an inventory adjustment of 100 and everyone gets back into the system and immediately you process the receipt you didn’t get to earlier…now the widget shows 210…an immediate error of 100 units within hours of the physical count.

Establishing a good cut-off prevents this. Good cut-off procedures may look something like this:

1. Establish a cut-off on the warehouse floor. For example, after 3 p.m. today we will stop shipping and receiving until after the count. Should goods arrive during the count they will be placed in a designated area (maybe marked by tape) and WILL NOT be counted. Similarly, any shipments picked and entered in the system but have not been shipped will be in a designated area not to be counted.

2. Insure all receipts of goods and shipments up to the cut off time are entered into the system BEFORE the inventory is frozen and count sheets are printed. Take the time to ask the questions

   1. Have all receipts been entered?

   2. Have all shipments been entered?

   3. Have all entries been posted?

3. Once you are confident the accounting system reflects the activity of the inventory on the floor up to the cut off time…FREEZE THE INVENTORY. If your software does not have a freeze feature, (Sage MAS 90, 200 and 500 does), simply keep everyone out of the system until the count is complete and the results have been posted.

Other tips for a good physical count are:

1. Consider using pre-numbered shelf tags. Benefits are:

   1. Physically shows items counted and not counted.

   2. A test count team can follow the count team and verify counts directly to the shelf tags.

   3. If an item is in multiple locations in a warehouse, individual tags can be added together and double checked to arrive at a total count.

   4. Account for the numbered tags when transferring the information to count sheets to determine if a tag is missing.

2. Perform test counts.

3. Once the count is entered, investigate significant variances before posting by considering the following:

   1. Perform another test count.

   2. Is the inventory possibly in more than one location in the warehouse?

   3. Was a cutoff transaction missed? A receipt or shipment?

   4. Was a significant adjustment made to the item since the last physical count or during the last physical count?

4. Try to look for reasons why the significant difference is valid and not just accept the result.

I hope these tips are helpful in your next Physical Inventory Count. Please let us know if you would like assistance in overcoming these or other physical count challenges in your organization so your next count can be an accurate one.

Mike DeRosa
DeRosa Mangold Consulting, Inc.
www.derosamangold.com
877-772-2980