THE IMPECCABLE INVENTORY:
HOW TO ENSURE THAT YOUR YEAR-END PHYSICAL COUNT PROCUDURES MEASURE UP
INVENTORY - OFTEN YOUR LARGEST ASSET
Accuracy at year end is crucial to the value of your company. Wide discrepancies between inventory records and physical inventory counts affect profitability, financial planning, strategic planning and taxes.
The most common and traditional approach to check on hand balances at year end is to take a physical inventory of all parts in stock and work-in-process. A physical inventory to adjust on hand balances will be successful provided that parts are properly identified and accurately counted. Despite the best intentions, a physical inventory can be affected by time constraints, problems with personnel properly identifying parts, correctly recording units of measure and accurate counting by inventory count personnel. To ensure that your count is successful, there are some basic procedures that should be followed:- Make sure one person is responsible for the accuracy of the count. This person should be responsible for investigating all variances noted during the count, approving all changes to inventory records and monitoring count personnel to ensure the count procedures are followed during the inventory. This person should also provide authoritative help to the count personnel when they run into problems or ambiguities while counting.
- Provide written count procedures to all personnel involved with the physical count. The expectations of the company should be set forth and explained to all personnel prior to the count. There should be a meeting prior to the count to go over the written rules. All count personnel should be made familiar with the counting and recording process and be sensitive to the importance of an accurate count.
- Decide who will perform the count based on their knowledge of the items to be counted. This means that if a stockroom contains fabricated parts, then those parts should be counted by personnel familiar with fabricated parts. If the counters do not know what they are counting, identifying the parts and correctly recording the units of measure will be a problem.
- A count team should consist of two people. A physical inventory is successfully accomplished by pairing an inexperienced worker with a worker who has a strong knowledge of the material in the warehouse. The experienced member of the team should count and the less experienced member should write the number of items counted on the sheet. The team member counting the physical items should count everything he or she finds. If it is on the sheet held by the team member, then the team member will write down the number counted. If the item counted is not on the sheet then the team member needs to write down the description, location and quantity of parts counted. The person physically counting parts needs to place a piece of brightly colored tape on the bin, box or part just counted so that the team knows that the bin, box or part was counted and the team won’t count that particular item again.
- Each team needs to be assigned an area to count. These assigned areas should be divided by geographic locations in the warehouse rather than by product lines. They can be segregated by yellow tape or defined by row. It is the responsibility of the person in charge of inventory count accuracy to assign teams to a designated area. It is important for each team to NOT LEAVE their designated area until the area is completely counted. When the team is done counting, the person in charge should inspect the area to ensure all boxes, bins and parts appear to be counted. It is a good idea for the person in charge to test count a few items before letting the team go on to another area. It is critical that teams do not start wandering around the warehouse searching for items. Movements of the teams must be controlled.
- Control movement of inventory and posting of transactions. The receiving and shipping departments need to be isolated during the count. Ideally, no items should be shipped or received during the count. If this is impossible, then activities in these departments should be as limited as possible. Anything that has to be shipped should be carefully and separately accounted for. Any items arriving in the receiving department should be marked “do not count” and these arrivals should not be posted to the system until after counting and reconciliations are complete.
- Investigate variances. The individual who is responsible for the accuracy of the count should also be charged with investigating variances between the physical counts and the accounting records. Before the accounting records are changed to reflect the quantities counted, the person in charge should recount the item, make sure no item has been moved during the count and that all locations for the item have been considered. Once the person in charge has considered all possibilities for the reason the records could be different and is sure the physical count is correct, then the change to the records can be authorized.
Accuracy of inventories at year end and year round, will improve efficiency and give you better piece of mind regarding the value of your on hand inventory. An accurate accounting of your inventory at year end will allow for better planning of the company’s need for short-term financing and procurement planning shortly after year end.
If you would like to learn more about improving the accuracy or efficiency of your inventory count or are interested in implementing cycle counting, please contact Judy Briggs, CPA, at (425) 454-7990 or jbriggs@bpcpa.com.