Physical Inventory Guide: How To Do an Accurate Count

Updated February 3, 2023

When a company nears the end of a reporting period or wants to account for its stock, it might conduct a physical inventory. This process involves using manual or electronic methods to count all products in a company's possession. The resulting information allows a company to manage goods more efficiently and make informed financial decisions.

In this article, we explain physical inventory, list the types, provide steps for conducting an accurate count and discuss the benefits of doing so.

What is physical inventory?

Physical inventory is the actual count of a company's retail goods and products. Businesses across various industries implemented structured approaches to accurately document their inventories at the end of reporting periods. They may use various methods to improve accuracy, such as collecting estimates from third parties or automating measuring and weighing processes. While physical inventory counts may be necessary to comply with tax regulations or accounting standards, many businesses count their inventories to plan restocking schedules.

Types of physical inventory counts

Here are some types of physical inventory counts:

Electronic counting

This method involves employees using computers and tablets to scan items into an inventory management system. These digital records make it easy to track inventory levels and find available products for customers. Electronic counting requires the company to invest in specialized technology, but the resulting improved accuracy and efficiency are often worth the cost.

Related: How To Track Inventory

Cycle counting

Cycle counting is counting inventory at different points throughout the day or week. This method can help stores save time and resources by allowing them to complete the total 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 complete inventory count.

Manual completion

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 and record results with pen and paper. Once the employees finish counting, they compile the numbers and review them for accuracy. This method may result in inaccuracies, but proper training can help organizations benefit from the affordability of manual inventory counts.

Full inventory

For full inventory counts, stores can rely on current employees or hire temporary staff. Supervisors provide individuals with helpful counting documents and instructions to accurately record the number of goods and products. If a third party conducts the count, it can be helpful for the store to organize and condense its inventory to make the job easier and more efficient. Full inventory counting can result in high labor costs and temporarily require the store to cease normal operations, but it's one of the most accurate methods.

How to count physical inventory

Here are five steps for conducting an accurate count of 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 consistent store operations. For example, you might schedule a complete inventory account after a store closes. Scheduling enough employees for this shift can help them complete the count before the store opens, allowing them to work without customers interfering. If a stock conducts a manual completion count, you might ask an employee to start the count at the beginning of their shift so they can finish before they leave for the day.

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 to find them more easily while counting. It can also help diminish the amount of inventory employees need to count in the back and help make room for incoming products.

3. Explain the process

Consider explaining the process of conducting a physical inventory account to anyone involved in the process. Emphasize the importance of adhering to company standards to ensure accuracy and efficiency. You might also provide training on procedures or special technology and only allow employees to count inventory once they've demonstrated proficiency in this skill.

4. Assign locations

Stores with vast amounts of inventory might benefit from assigned locations. For instance, a shift supervisor might delegate an aisle to every employee and have them double-check the aisle to their left to ensure accuracy. Some stores require each department to conduct inventory for relevant goods, as the team's familiarity with specialized goods can streamline the process. Note that this method is also beneficial if you want to close off certain aisles at a time instead of shutting down the entire store.

5. Compile and review the count

Because companies rely on inventories to reorder products and make financial decisions, it's important to ensure the accuracy of every count. If two employees conduct counts of the same inventory, consider comparing their documents to ensure they align. Recounts, assessments of inventory management software or additional employee training may be necessary if you discover significant discrepancies.

Benefits of a physical inventory count

Benefits of physical inventory counts include:

Increasing customer satisfaction: Accurate inventories help customers better understand what's available for sale, meaning they're more likely to trust the company and have positive shopping experiences.
Planning restocks: When a company starts to run low on a product, its inventory management system can alert them to place a reorder or even perform this task automatically.
Identifying promotion opportunities: If a count reveals products that aren't selling because of damage or irrelevance, the company can sell them at a discount to generate profit and create more room in their warehouses.
Maintaining finances: Accurate inventory records ensure a business can develop a reliable budget, document earnings and create financial reports for stakeholders.
Monitoring theft and damage: Tracking instances of theft and damage can help companies understand their causes and prevent future instances to save time and money.