Which of these Inventory Reconciliation Techniques is Best for Your Business?

by Dhiren Bhatia / December 17, 2018

As a small business owner, you know there’s a lot of money tied up in the products and supplies on your shelves.

Many business owners keep an eye on reports from inventory tracking software, but they don’t always take the time to make sure those quantities match the actual number of products on-hand.

Inventory counts can be inconsistent for a number of reasons. Discrepancies may be due to accounting mistakes, operational errors, or other losses, such as those from theft or damage.

Inaccurate counts are a big problem. They increase the odds you’ll unexpectedly run out of product. They can result in overpaying your taxes. And if you don’t take the time to compare actuals to estimates, you’ll never be able to identify sources of “shrinkage,” the official term for when there are fewer items in stock than you‘d accounted for.

These problems can be fixed the old-fashioned way: By manually counting the inventory.

Inventory Reconciliation Basics

Although the idea of counting everything in your store can be intimidating, here’s some encouragement: While complicated and sometimes tedious, the task itself is actually pretty straightforward.

In the simplest terms, you count the items in stock, compare the totals to the number you thought you had, try to account for the differences, then update the stock number to reflect the true amount.

Thankfully, inventory management software makes it easy to keep inventory data accurate in real time. These programs deduct inventory as it’s purchased and add it as it’s delivered. This is called “continuous” or “perpetual” inventory, and it’s a big upgrade from the days when store owners used to rely solely on occasional manual counts.

Software also makes it much easier to track and count products using barcodes and other tracking systems. These features make locating inventory and counting it much easier for employees.

Regardless of which software tool you’re using to track inventory, you still need to make sure that the data shown in the system is accurate, as we mentioned. When it comes to the task of manual reconciliation, you can take a combination of these three approaches.

Option 1: The “All-at-Once” Approach

What happens: Your employees close the business to count every piece of inventory you have. Depending on your needs, this can happen annually or semi annually. (Many companies choose to do the reconciliation near the end of the year so that they have the most accurate data possible for their taxes.) Some companies divide the inventory into halves or quarters and split the task up, but it still requires a majority of employees and interrupts business.

The perks: This approach is comprehensive and accurate. It can also be scheduled to accommodate your needs. For example, you can plan to do the count when you expect your stock to be the lowest, such as after the holidays or another busy time for your business.

The downsides: It can be expensive. Unless your establishment is very small, it is a huge undertaking that will hurt your revenue potential for the days it’s happening. It likely requires a full staff, too, although some companies opt to hire a third party company to do the job. When the task is done infrequently (such as in the case of a single annual count), your staff may forget the process from year to year or turn over quite a bit by the time the next reconciliation comes around.

To do it right: Plan ahead thoroughly. Analyze the data on your sales and activity to find the best time to hold the event. Let your customers know that you’ll be closed for business, and communicate responsibilities clearly to your staff. Before you start, make sure your boxes and shelves are labeled, and even create a map to clarify exactly how the counting will proceed.

Option 2: Cycle Counting

What happens: Instead of counting all of the inventory at once, your staff will break down inventory into smaller groups and reconcile the counts for those groups regularly. Over a designated time period (such as each quarter, six months, or year), all of the inventory in the store will cycle through the reconciliation process.

The perks: Cycle counting tends to be much more manageable and affordable than full counts, because your business won’t have to close its doors or pay its staff for days without any revenue coming in. Cycle counting can also get you recent data more quickly. You can schedule inventory for certain products at the times it makes the most sense to count them (such as after their busy season). Finally, this method keeps employees more accountable, especially if you don’t announce your system.

The downsides: This method requires regular commitment to work effectively. If the task doesn’t become part of your staff’s routine, it could fall by the wayside or fall behind to the point where a full count is necessary anyway. Compared to the total count approach, cycle counting may also be a little slower to reveal big-picture problems that are more noticeable when you get the whole picture at once. Also, some managers that choose to cycle count will still need to do a full inventory check each year, such as to calculate taxes and employee bonuses or simply double check the cycle counts.

To do it right: Make sure that your employees have the time, resources, and training to do their inventory tasks consistently. Use software to decide how products for each cycle will be selected and tracked. Consider assigning employees to count inventory other than the inventory they’re in charge of handling regularly and keep your schedule to yourself until it’s time for the task.

Option 3: Spot Checking Inventory

What happens: Instead of worrying about getting everything in the entire store accounted for at once or by the end of a certain time period, you can focus on certain products. You may decide to pay attention to the inventory that’s prone to theft or damage, the products that move off the shelves quickly and are therefore prone to errors, or higher value items that make a bigger impact on your bottom line.

The perks: Spot checking inventory can be the perfect way to supplement the other inventory reconciliation techniques we already talked about, and to make sure that the most sensitive products get the attention they deserve.

The downsides: Unless spot checks are accompanied by another, more comprehensive inventory reconciliation method, you won’t get the most accurate picture possible of your inventory.

To do it right: Use what’s referred to in the inventory world as the “ABC Analysis.” The ABC analysis attempts to identify the types of inventory that are the most important to get right, inventory-wise and focuses on those more frequently.

This Vend blog post explains:

“Your ‘A’ group consists of your top-performing 20 percent of products while your ‘B’ and ‘C’ groups consist of the remaining 60 and bottom 20 percent, respectively. The key is counting your highest-impact items more frequently than your bottom-performers.”

You can also tailor inventory spot checks to meet the needs of your business. For example, you may choose to spot-check those products that are in season at the times when they’re flying off the shelves.

The Importance of Inventory Management Software

Todays’ inventory tools are amazing. They have the power not just to make reconciliations as easy as possible (regardless of which combination of the three approaches you decide to take), but to handle tasks like demand forecasting, automatic reordering, managing relationships with suppliers, and much more.

Today’s savvy business owners are opting for SaaS models over installed software. These web-based programs can incorporate directly with the point of sale systems, accounting software, and even marketing and HR software to create a truly comprehensive program to run your business.

Please contact Cloudscape Technologies to learn more about how the best cloud-based systems on the market today can work together to create a software solution that will take your business to the next level. We empower business owners throughout the process and tailor it to your unique needs so that the process doesn’t interrupt your main goal: running your business.

Click here to book your free, no-obligation consultation.

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