Physical Inventory best practices

Most accountants and business owners don't like to hear the word inventory at this time of year!  I worked for a CPA firm for the first three years out of college and everyone who wasn't a manager or partner had to help take physical inventories on either December 31st or January 1st.  My most memorable sounding experience was counting bull semen for a genetics company.  It actually wasn't bad-test tubes stored in tanks of liquid nitrogen so it was cold, but the company was well managed so the the physical count went smoothly.

Every business which owns inventory needs to take a full physical count at least once a year.  Year-end is the most common timing as it insures that the ending numbers are correct and the tax authorities hope it that COGS will be correct as well.

The way to insure that a physical count is as painless as possible is to plan and prepare well in advance.  Planning will keep the count organized so employees don't get frustrated, time isn't wasted and the numbers are accurate. 

Once you have set the date for the count, notify everyone of the shut down or non-shipment period.  You don't want to be receiving new inventory when you are counting the existing inventory.  Verify that all inventory has been received into your data system and all inventory transactions are current in your system prior to the count.  Print out the count sheets and assign them to employees.  The count sheets should have the amount on hand according to your accounting program and another spot for the actual count.

On the day of the count, make sure you have good coffee and perhaps, donuts on hand to start the process on a positive note!  Divide the location into counting areas.  Divide and conquer in little steps.  Break the overall counting process into a series of smaller counts.  Make sure employees know to make note of any damaged or obsolete inventory and that the items are properly marked if they aren't disposed of immediately.  You don't want to make the mistake of counting them again next year!  Make note of all counts and investigate any large differences between the system and the actual counts.  Make your adjustments are you are ready to start the New Year.

Taking a physical inventory isn't something people look forward to, but if you are organized it can be relatively painless and it can leave you with a sense of accomplishment knowing your books are accurate to start the New Year.