Guide to Physical Inventories

By Indeed Editorial Team

Updated December 1, 2021 | Published March 1, 2021

Updated December 1, 2021

Published March 1, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Counting the inventory of a retail store is important because it can provide helpful information to managers and the store's parent company so they can make influential business decisions, such as what goods or products to reorder and if a store needs training or development to improve their sales and revenue numbers. Using important counting techniques and understanding helpful terms, such as physical inventory counting, can help retail stores manage their products more efficiently and report accurate numbers to company executives.

In this article, we discuss what physical inventory is, explain types of inventory counts and list steps to show you how to perform a physical inventory count yourself.

Related: What Is Inventory Management? Definition and Example Techniques

What is physical inventory?

Physical inventory is the in-person count of retail goods and products that a company owns. Most often, an employee of a retail store will count the inventory being sold on the floor and the products currently held in the location's storeroom to generate the physical inventory count results. These counts normally occur during the end of every reporting period and a company can use their information in several ways, including:

  • Ensuring correct inventory levels: It's possible in retail that reports might not always reflect what's actually in stock. The physical inventory count can help to make sure inventory records are accurate and that the store has accounted for discrepancies.

  • Monitoring theft or inventory damage: Conducting physical inventory counts can also help stores monitor any theft or damaged products. If inventory is being stolen, inventory counts can help identify which inventory was taken and roughly when it was taken based on the date of the last inventory count. If products are damaged, it might be helpful for a store to replace them right away.

  • Reporting income and earnings: Knowing the correct inventory levels can also help stores generate an accurate income and earnings report to reflect how much money the store has made. This can help the company create helpful financial reports for stakeholders and investors.

  • Developing a reliable budget: Understanding how much inventory a store has sold and how much is still leftover can help companies develop an accurate budget and inform them how much inventory they need to purchase in the future.

Types of physical inventory counts

Here are the four types of physical inventory counts:

Electronic counting

Electronic counting uses special technology and equipment to scan inventory and organize it on computers, tablets and other systems to help create a more accurate count of goods and products. Through electronic counting, companies can set up more efficient tools that can allow employees to instantly search and track inventory levels to better help customers. Though counting inventory using this system helps improve accuracy, the electronics involved with the count can add to a company's expenses, and setting up and using the system can increase the time it takes to conduct the count.

Related: How to Track Inventory

Cycle counting

Cycle counting is taking inventory counts at different points throughout the day or week. This can help stores save time and resources by allowing them to complete the full count in manageable sections. It also allows stores to stay open, so they don't have to shut down operations like they might for a full inventory count. However, depending on the cycle counting method, it's possible some stores might not compile a full list of inventory frequently enough to be beneficial for a company's financial reports.

Manual completion

The manual completion of the count involves using one or more employees to walk around the store, both on the floor and in the storeroom, and count the inventory recording the results with pen and paper. Once the employees finish counting, the numbers are compiled and reviewed for accuracy. This method of counting can help save the company costs, such as expensive technology and other resources, however, depending on the size of the store and the dedication of the counters, it's possible that there may be some inaccuracies in the final record.

Full inventory

For full inventory counts, stores make use of current employees, or hire a temporary staff, to fully count the store's inventory. Managers can provide individuals with helpful counting documents and instructions to record the number of goods and products with accuracy.

If hiring an outside company to conduct the count, it can be helpful for the store to organize and condense their inventory to help make the job easier and more efficient. Full inventory counting can be very accurate, however, in most cases, the store has to spend extra costs on labor and will often have to shut down the operations of the store to perform the duty.

Related: How To Calculate and Improve Inventory Accuracy

Benefits of a physical inventory count

There are several benefits to conducting a physical inventory count, including:

  • Increasing customer satisfaction: When your list of inventory is accurate and reflects what's currently in stock, customers can have a better understanding of what's available for purchase, which can increase customer satisfaction and sales. For example, some companies have the ability to track their inventory electronically and display it online. If a customer can accurately see what you have in stock, they can find what they're looking for more easily.

  • Helping plan for loss: Physical inventory counts can help stores determine if they are running low on certain goods or products. If the store is at risk of an inventory shortage, they can use this information to order more product so that it arrives on time to increase their current supply.

  • Identifying products to sell with promotion: After conducting a physical inventory count, there may be goods or products that are either not selling well or have a challenging defect, such as broken or disheveled packaging. Using the inventory count, employees can identify and mark these products so the store can sell them with a promotion, or dispose of them to make room for better selling inventory.

Related: What Is a Sales Promotion (With Tips and Examples)

How to count physical inventory

Here is a list of five steps you can follow to count your physical inventory:

1. Schedule the count

Depending on which type of count you're planning to conduct, it can be important to schedule it ahead of time to ensure it doesn't hinder the sales of the store. For example, if you're planning to do a full inventory count, it can be helpful to schedule the count during slow business hours, such as right before close, or to schedule for employees to conduct the count after the store closes or before the store opens.

This can allow the store to avoid shutting down operations and help the store keep their top-selling business hours. If the store is conducting a manual completion count, it's important to schedule the employees performing the duty to begin the count at the beginning of their shift, so they have enough time to total the inventory before they clock out.

2. Restock the floor

Before conducting the count, it's important to restock as much inventory on the floor as possible to help create an easier counting experience. Moving and sorting inventory from the backroom to the selling floor can help employees organize the products so they can find them more easily while counting. It can also help to diminish the amount of inventory that employees need to count in the back and help make room for incoming products.

3. Explain the process

If conducting a physical inventory count with several employees or individuals, it can be helpful to explain the process and go over any important information found on the inventory count documentation. If using special equipment or technology for an electronic count, it can also be important to explain the operating system of the counting software and demonstrate how to make adjustments if necessary. Explaining the process of the count in detail beforehand can help save time by covering all employee questions or concerns right away.

4. Assign locations

Depending on the type of count the store is using, it can be helpful to assign specific locations to each individual or group of individuals. This can help to increase the speed and efficiency of the count. For example, if you're conducing a full inventory count for a large retail store, it can be beneficial for the manager to break their staff into teams and have each team count a different department's goods and products, including kitchen appliances, toys and games, and more.

If the store needed to shut down operations to conduct the count more efficiently, assigning locations can save time and help reopen the store more quickly to stop the store from losing too many sales.

5. Compile and review the count

It's important to compile all counting documents and review them to ensure they're accurate because the count can inform the parent company of relevant details they can use to make influential financial decisions, like inventory reordering, company budgets and even adjustments in salaries. If your store has conducted a count which involved more than one employee, it can be helpful to check the documents to make sure they counted every category on the list, and then combine the information into a comprehensive set of data.

After you compile the data, cross check the results of the current inventory counts with previous ones. If they're relatively similar, it might indicate that the results are fairly accurate. However, if there are major discrepancies between the two counts, consider asking some employees to recount certain products or store departments.

Related: 15 Types of Inventory (With Examples and Tips)

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