How To Eliminate The Dreaded Year-End Inventory.
Updated: Dec 9, 2022
"The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year." -John Foster Dulles.
For many companies on a standard calendar fiscal year, this is the time of year to check ending inventory balances and quantities on hand. While there are a few methods to estimate closing inventory balances, such as the Gross Profit Method and the Retail Inventory Method, neither corrects the inventory quantity you currently have on hand. Therefore, knowing your items' actual inventory quantity is crucial to inventory accuracy, planning, and customer satisfaction.
Physical inventory counting is the most accurate way to determine inventory balances. Modern business software systems such as Enterprise Resources Planning (ERP) handle all the calculations and provide an orderly flow to the process. However, training, resources, counting, and timing require much more preparation.
Physical inventories are typically done in one of the following two ways.
1. Full Physical Inventory A complete physical inventory is done by counting all unsold items on hand. This is the least preferred method as it requires a lot of planning, resources, and time. While it is an effective way to true-up what you have on hand versus what the computer records show, it does not allow much time to research and identify the true source of incorrect records created earlier in the year. In addition, there is little patience in the last week of the year to research and reconcile 12 months of inventory transactions. Inventory accuracy is at or near 100% beginning January 1st, but it can quickly deteriorate within a few months or sooner.
2. Cycle Counting Cycle Counting is done regularly throughout the year by frequently counting items in smaller groups. When done correctly, cycle counting can eliminate the need for an entire physical inventory at the end of the year. If your company has inventory accuracy problems, cycle counting will help you find the source of errors. Keeping your inventory records accurate all year long is more important to sales than a one-time year-end count. Find and eliminate mistakes sooner rather than later.
The best time to implement a cycle counting program is immediately after a complete physical inventory. Since everything has been counted and updated in the computer records, you can maintain and improve inventory accuracy as you go along as opposed to the last week of the year. Cycle counting is not a switch you turn on but a culture change requiring training, planning, and total management commitment.
Champion Business Solutions, LLC, can help you end the year-end misery of physical inventory counts. We offer workshops, training, and support for improving your business operations. For more information, don't hesitate to get in touch with us.
Roger Pujol is a business improvement consultant and founder of Champion Business Solutions, LLC. He speaks and writes about encounters helping small to medium-sized businesses (SMBs) improve their business operations.© 2022 Champion Business Solutions, LLC