Ultimate Checklist for Retailers: Physical Inventory Counts

by Karen Wong, ACE POS Solutions Ltd.

Physical inventory is the largest asset for many businesses but especially for retailers. For a small retailer with limited resources, how inventory is managed has the greatest impact on cashflow and ultimately profitability.

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Physical inventory counts are one of the most tedious tasks for a business. They are expensive to run, time-consuming to do and prone to human error. But in case you're wondering why you should even care about counting your inventory, remember that businesses that don't have accurate inventory counts and valuation risk much higher operational and inventory carrying costs. In this post we will go over the best retail industry practices for physical inventory counts (FREE Downloadable Step-by-Step Checklist below) to help you prevent:

1) Inventory shrinkage - the amount of inventory lost in the course of doing business. These include everything from receiving errors and improper cashier entries to internal and external theft. The cost of shrinkage to a retail business is significant if it is not noticed as you not only lose the value of the goods (assuming they are missing), you lose the sales that could have been made from those goods. You will also be encouraging growing shrinkage if the goods were stolen as thieves will only grow ever more confident as their crimes goes undetected.

2) Over or Under Stocking as stock levels - and correspondingly safety stock levels - will be unreliable leading to missed purchase orders or too much deadstock as products are ordered at the wrong time. This may not sound important but a key driver of lost revenue is poor management of automatic re-orders. If you are using a POS, this refers to automatic reminders for you to re-order based on sell-thru and your product min/max settings. If your inventory on-hand quantities are off and your system thinks you have 9 items when you only have 3, then it will not trigger a re-order even if your safety stock level is 3. You will end up with an empty shelf and lost revenue from any customer who comes in to buy that product but ends up leaving empty-handed. Even worse, you will not re-stock that item until somebody notices the error which means it could remain out of stock for a long time or you could, hypothetically, end up with a warehouse full of boots in the summer!

Physical inventory counts should be done by retailers at the end of every reporting period (whether monthly, quarterly or annually) to detect shrinkage and prevent lost revenue. Well-executed counts will also increase the accuracy of store inventory which leads to better cash planning through improved purchasing.

In a full-feature Point-of-Sale system, you will have the ability to perform:

Full Counts which are generally performed once annually, only at the end of the financial year to provide your accountant with the value of your year-end inventory. As everything is counted (floor and storeroom inventory) during a full count, many retailers choose to close the store or conduct the count outside of normal business hours.

Partial Counts which are performed on small sections of a store throughout the year during regular business hours for inventory accuracy and to catch any anomolies. They also help to reduce the amount of work required during the annual year-end full count. Partial counts are different depending on the industry but many retailers choose to do them by store map (e.g. shoe section), by brand, by type of product, by vendor or by the importance of the products to your business. With this last option it makes sense to count the inventory items that make up most of your sales more often than your slower-moving products. With the ACE Retail point-of-sale system, you can run multiple partial counts at the same time as long as you are careful to avoid duplication (physically counting the same item more than once) as our system can accumulate counts by multiple people or devices before you finalize the entire count batch.

How to Optimize Physical Inventory Counts for Retail Stores

Now that you're ready to do an inventory count for your store, there are many things you can do to minimize the disruption to your operations and ensure it runs as smoothly as possible. Generally speaking, there are two parts to preparing for an inventory count: Pre-Count Preparation and Count-Day Best Practices.

Pre-Count Preparation (Download Ultimate Checklist)

Use an electronic scanning device to scan inventory barcodes. With new technology, you can save time and money by taking advantage of cost-effective inventory scanning software applications such as ScanNow. While it is best if all of your inventory is already barcoded, the software for your device should be able to handle multiple counting methods (manual entry, keyword search, barcode scanning) in case your staff come across items without any scannable tags. Applications such as ScanNow can even handle mobile barcode printing which is great for printing tags while counting or receiving. Make sure to check in advance that all of your devices work and that they are all charged (with extra batteries if required) before your count day.
Schedule your count when inventory is at its lowest. Try to schedule your inventory counts when you expect your stock levels to be at their lowest. This will reduce the cost and time required for your count. For many retailers this may be right after your high season such as after Boxing Day but before you bring in new stock. If you're doing partial counts, this could be seasonal products such as Halloween products at the beginning of November or summer sandals in September. NOTE: If your goal is to keep a closer eye on shrinkage, you should run random partial counts during your selling seasons so that you can respond immediately while the selling opportunity of the product you are counting is at its peak.
Don't announce your count schedule too far in advance and do random partial counts. If shrinkage is a major problem for you, don't be too predictable with your count schedule. Keep employees (and any internal thieves) guessing by doing random partial or full counts.
Quick scan of inventory condition prior to counting. Several days before your scheduled inventoy count, do a quick visual scan of the inventory you expect to be counting. You will save time during the count if your floor staff prepare bulk goods, complete any in-progess assemblies or fix any missing tags or barcodes in advance.
Dispose of any defective or obsolete stock. Save on the cost and time required to count defective or obsolete inventory by disposing of it prior to the full count - e.g. returning deliveries to vendors or writing off stock.
Pre-count slow-moving products or areas. If you plan to shut down your entire operation for the count, you can speed up the full count by doing and finalizing partial counts for any slow-moving products or areas prior to the full shutdown. Remember to tag or block off these areas to avoid them being mistakenly re-counted again during the full count.
Pull and ship all inventory required to fulfill current open orders. This will minimize the chance of counting already allocated stock.
Freeze or reduce warehouse activities. Stop or minimize deliveries, transfers and assembly right before your count to minimize the chance of double-counting or omitting quantities with changing stock levels. If you have frequent deliveries or run production (or assembly) lines, it is recommended that you inform your suppliers and production supervisors of your physical count schedule so that they can better coordinate with your needs.
Complete any documents for products already delivered or shipped. Any products delivered prior to the count and included in the count should be processed as received in your POS or inventory system before you start counting. For items to be shipped, make sure they are processed and removed from your starting inventory quantities in your POS or inventory system before the count as they are already sold.
Complete any remaining inventory transactions. Make sure to finish processing any completed transactions (e.g. transfers, returns, etc.) in your POS or inventory system before you start your physical inventory count since these type of inventory movements will affect your count results.
Inform any off-site storage locations. If you use any third-party or outside storage facilities, make sure to notify them of your official count date in advance so that they can forward their count information to you on the same day.
Start Inventory Count after completing all outstanding receivings and transactions. Remember that starting the Inventory Count feature in the ACE Retail point-of-sale system will set the freeze date (the posted count inventory date). Any sales or receivings thereafter will be automatically adjusted as of the freeze date. NOTE: Please do not backdate any receiving documents entered after the inventory count has been finalized. If you have missed any receiving documents, please contact us at This email address is being protected from spambots. You need JavaScript enabled to view it. for instructions on how to adjust for this.

Count-Day Best Practices (Download Ultimate Checklist)

For stores with mixed stock, count by location. To minimize double-counting or missing items, if you store different SKUs or inventory types all together, count by location, not by product.
Don't move any misplaced products while counting. Finding misplaced items is common during an inventory count but all counters should be instructed to count those items, mark them as misplaced (e.g. place them in a bin) and then leave them in the wrong location until after the count is complete. While this seems like a waste of time, moving items around during an inventory count will greatly increase the chance of double-counting. Better to finish your count accurately and then re-stock the misplaced items all at once afterwards.
Assign store sections or count areas. Depending on the size of your store and the size of your team, it is recommended to permanently assign sections of your store to specific staff members. This makes them accountable for the accuracy of their own inventory counts, damage rates, cleanliness, etc. To make it even more effective, you can include this in their performance review. If you don't have enough staff to make permanent assignments, on your count date, you should assign staff to certain areas, floors, brands or products. Remember to always have a manager on site during the count to keep track of the process, keep an eye on suspicious behaviour (e.g. theft during the count), which teams have completed their assignments and to re-assign them as required to speed up the entire process.
Mark off areas as they are completed. After scanning thousands of items, it's easy to forget what has or has not been counted. Make sure to mark off areas as they are completed to avoid duplication.
Track consignment products separately. If you carry any consignment products, make sure that you track the counted quantities separately. With the ACE Retail point-of-sale system, we recommend that you count them in a separate inventory count batch so that you can send them to your consignor (vendor) and so that the figures are not accumulated together with your own inventory stock for accounting purposes since these inventory items are not assets owned by the company.
Pre-print product labels or use mobile barcode printers. If you're tagging any already received products while counting, make sure to pre-print your product labels, or even better, use an inventory counting software such as ScanNow together with mobile barcode printers to print as you go.
Freeze sales order fulfillment or receiving of deliveries. For the highest accuracy, we recommend that you stop fulfilling all sales orders and receiving any deliveries during the count process. We know that stopping fulfillment is painful for retailers (especially for online stores), but running a business with inaccurate data can be even more costly than a day of lost sales. If you're going to the expense of doing an inventory count, you will want to get it right the first time!
Have a trusted staff member post count results into your system. This may seem like duplication of effort but it is important that the person counting and the person posting inventory count results be different for proper checks and balances. Only the person posting the results should have the ability to finalize the counted results after reviewing any discrepancies. All of this talk about internal theft is not meant to imply that staff cannot be trusted. After all, in many companies, it is hard to stop shrinkage without the full participation of your staff. It is simply not a good idea for the person counting to have full access to your POS or inventory system since that creates an opportunity for that same person to revise starting inventory quantities to hide any missing inventory stock. While it may seem like unnecessary extra work, remember that if you're using an integrated electronic device such as ScanNow, having a separate person "posting" will not slow down the process as count results will be posted directly into the system.

Inventory count is a stressful but necessary cost of running a retail business as having accurate reports of available products is crucial to making the best marketing, sales and purchasing decisions. Hopefully this article will help you have a better idea of how best to prepare for this important business function.

Don't forget to download our planning checklists above to help you save time and money with your next physical inventory count. Happy Counting!

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