Suggestions for Your Annual Physical Inventory

The business year will come to a close for many companies on December 31. An integral part of the closing process is the tedious and time-consuming annual physical inventory. Having endured just a few of these, I have the following suggestions to help make the process go a little smoother.

Send out notifications to all affected parties

Notify your suppliers that you will not allow deliveries while the physical inventory is in progress. Place a “non-delivery” notice on your purchase orders. Notify all transportation companies that regularly service your facility of the delivery and shipment restrictions. This will allow them to use their time more efficiently and they will appreciate your cooperation. Notify your auditors or accountants and arrange for count verifications by their staff.

Advise your sales people and customers of the shut down or non-shipment period. Publish a cutoff date for placement of orders to ship before the shut down.

Inform your employees well enough in advance to avoid a conflict with vacation schedules. This will also allow them to incorporate the tasks in their regular work schedules.

Print and distribute a schedule of all planned activities during the physical inventory. Make sure it lists who is responsible for each task.

Do some housekeeping

Clean up the storeroom area (sweep and remove all trash). Straighten up the inventory items for easy counting and make sure each item is contained within its assigned location. Avoid storing similar items in adjacent locations if possible. Make sure all items are clearly identified. Consolidate all quantities for the same item to reduce the number of locations wherever possible. Combine quantities into larger units for ease of counting (i.e. stacks or packs of 20). Make sure all storage locations are definitive and clearly marked.

Identify damaged goods and move them to a designated location or return them to the vendor for credit. Identify obsolete inventory and move it to a special storage location. Dispose of it as soon as possible to eliminate the cost of storing and monitoring it. Dust, spoilage, last year’s inventory tags and / or cobwebs are telltale signs of obsolete or excess inventory. Have the counters note these observations on the count sheets for further review and action when the physical inventory is over.

Update the warehouse floor plans with accurate stocking locations. Determine what is not to be counted such as warehouse equipment, packing supplies and miscellaneous items not on the inventory records. Make sure they are clearly marked.

Establish and formalize your physical inventory policies & procedures

Ascertain from your auditors or accountants what percent error will require a recount. The computer “balance-on-hand” should be corrected to the counted amount when it is within the accepted tolerance level.

Procedures should be published regarding: method to be used to identify locations that have been counted; count sheets and their use; recording quantities; reconciling discrepancies; unknown items; assignment of counting teams; emergency or rush shipments; and auditor’s approval requirements

Have the information services department update your files

Arrange for editing of all inventory files and have all file maintenance completed before the printing of any reports or count sheets. Place special emphasis on the accuracy of descriptions, units of measure and locations.

Make sure that all transactions (receipts, location transfers, issues, customer returns, vendor credits, cost updates, adjustments, etc...) have been recorded before any reports or count sheets are printed. Once completed no transactions of any kind should be entered or processed until after the full inventory procedure is finished.

Have the count sheets printed in location order and numbered for good control. Print the sheets on three-part paper to simplify recounts and lost pages. Print manual count sheets to record items in the warehouse that are not on the printed count sheets.

Plan for your logistical needs

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