In our last article, we discussed the importance of doing a physical inventory at least once a year and discussed some things to think about to make sure you get the best possible result. We talked about making sure you knew where the inventory to be counted was located. We also discussed who would be counting the inventory and how well equipped they were to perform the count. Lastly, we discussed using technology to make the count easier. In this article, we want to complete the circle of inventory so to speak and talk about when to do the inventory, how can you be certain you are complete and what accounting entries, if any you will need to make. First up is when:
- In an ideal world, you would close the store while you are taking inventory. In that way, you can freeze the inventory and be certain that no pesky customers are wanting to buy product while you are counting it. The question is, can you afford to close the store for the time it will take. If you can afford it, then by all means do so. This also plays into the technology you use. If your system supports scanning to perform your inventory, most times an inventory of a single location of about 1000 different items (SKU’s) can be done in 6-8 hours or certainly by closing the store early, counting and then finishing the count before the next day when you open. If you have a large number of SKU’s, that might not be reasonable, therefore you might have to close for a day or so. I remember switching over one of our clients from a manual system and it took them 2 complete days to get everything counted, but that is an extreme example and her customers looking to get Fido his food were none too happy. A lot of systems allow you to freeze the inventory and still keep taking sales and receiving inventory. In this case, the system will provide an indication of what changed and either automatically make changes based on system changes to inventory, or allows you to make the adjustments manually. While it is great when the system provides this capability, I still think the best inventories are done when the store is closed.
- How will you know you are done? Remember we talked about making a list of everywhere you have inventory. While making the list, divide up the locations by zones and assign one people to count a zone. Once that zone is counted, put a sticky note by it. As a side, not, sticky notes are pure genius, make lots of use of them. If you want to make absolutely certain, mark each label with a small dot or another indication that the item has been counted. Once all of the zones are complete, spot check a few items up to a dozen or so at random to make sure that they have been counted.
- Last up, so you have completed your inventory. NOW WHAT? If your POS system is connected to your accounting system, the system should make the appropriate entries for you. For example, with QuickBooks POS desktop, by default the entry is posted to an Expense called POS Adjustment Expense. I would recommend that you look at that account and perhaps make an entry to move the dollar amount out of POS adjustment Expense and into a Shrink account. My concern with using the generic account is ALL inventory adjustments whether damaged or loss to theft etc. will end up in that account and not tell you if you are having a problem. I also encourage you to run the inventory report in your POS system and see if the cost ties out to the inventory account on the balance sheet. Just a hint, it should. If the 2 systems don’t talk to each other, then you will need to post the adjustment to inventory manually so that the two system agree.
If you follow these common-sense rules, you can make sure the time and money you spend on doing a Physical inventory are not wasted. Retail in particular is all about managing inventory, get it right and you can be the next Costco or Wal-Mart. Get it wrong and find yourself in a world of hurt.
