What is Inventory Reconciliation and How Will It Help You Save Time and Money?

How accurate are your inventory records?

As a retail business owner, your inventory is in a constant state of flux. It’s virtually guaranteed that for the most part, your latest inventory records don’t match your actual physical inventory with 100 percent accuracy.

That’s why you have to periodically reconcile your inventory records against your physical stock. Doing so helps you identify the source of discrepancies, improve your procedures, and prevent loss due to theft.

Verifying inventory records is a monumental task even for a small business. Most companies shut down for several hours in order to perform inventory reconciliation, missing out on sales opportunities they would otherwise be able to enjoy.

Is there a way to reconcile inventory records with physical stock without closing up shop? If you have the right approach and the right equipment, there is.

What is inventory reconciliation?

Inventory reconciliation is the process matching your stock records with what you physically have in your store. In addition to counting items and updating your records, this whole process also lets you find stock discrepancies, so you can address them.

In this post, we’ll take a closer look at the steps involved when you’re reconciling your stock, as well as some tips to make the task easier.

Let’s dive in.

How inventory reconciliation works

The finer details of the inventory reconciliation process will vary from one retailer to the next, but generally, this is what happens when a retailer reconciles their stock:

Step 1: Counting your products

First, the business shuts its doors to the public, typically for a few days. It can be helpful to spend some time organizing your physical retail space to make inventory easier. Proper preparation can save hours of time over the course of stock reconciliation.

Some retailers, in particular large department stores, will spread out stock reconciliation over the course of a week, paying employees overtime to spend an extra few hours every night – this method keeps the business running, but it presents other costs, like overtime pay.

Step 2: Checking (and re-checking) your records

Next, employees compare written inventory records with the physical presence of each item in stock. The lists are checked and re-checked to make sure that no employee misreads a stock number. Non-serialized items may have no stock number and need to compared to supplier invoices.

Once this time-consuming process is complete, you can compare the results to determine what inventory discrepancies exist. These can be due to missing paperwork, bad math, human error, supplier fraud, or unlisted products sold on consignment.

Step 3: Addressing the missing items

Once these discrepancies are found and accounted for, you have to address the missing items. This requires going through sales paperwork to identify whether certain sales have been overlooked. Often, when a simple math error does explain an inventory discrepancy, a missing sales receipt can. If there is no missing sales receipt, then you are left with theft or supplier fraud.

The difference between the amount of stock you show on paper and the amount you physically have is called shrinkage. Shrinkage is typically expressed as a percentage using the following formula:

The National Retail Federation calculated average inventory shrinkage for the year 2016 at 1.44 percent of total sales. This figure changes depending on your specific industry, but if your losses are more than double this figure, you should take immediate action.

Step 4: Figuring out the reasons behind any discrepancies

At this point, can interview your employees to determine if anyone is misappropriating company inventory. Begin with inventory employees, fanning out towards those who have access to the stockroom and ending with your sales team. But finding the culprit is not guaranteed – despite this effort, you may have to simply accept unexplained shrinkage as a fact of life.

Step 5: Ensuring your records match

Regardless of the motive for inventory loss, you need to reconcile your inventory records to match the actual number of items you have in your inventory. Doing this requires creating a stock reconciliation statement that overrides your previous figures and represents your current stock accurately.

If you are using Excel, there is no format for stock reconciliation statements, so you will have to manually update each affected item.

If you’re a modern inventory or retail management platform, you can reconcile your records simply by updating the items in your system.

While this generates an abrupt break in your inventory statement, it lets you create a general ledger that becomes the official starting point of your future inventory.

Streamlining inventory reconciliation through cycle  counting

There’s a way to keep an accurate rolling snapshot of inventory without having to close your shop’s doors regularly. This is called cycle counting and it prioritizes inventory reconciliation steps in such a way that it breaks a big process into smaller, manageable tasks.

At its most basic level, cycle counting means reconciling only a small portion of inventory at a time. Instead of closing your store and systematically counting through every single product, you group your products into various categories and work from there.

There are several cycle counting methods you can adopt to streamline the process of reconciling inventory.

1. The ABC method

The ABC method groups your products by cost or turnover. Your “A” group consists of your top-performing 20 percent of products while your “B” and “C” groups consist of the remaining 60 and bottom 20 percent, respectively. The key is counting your highest-impact items more frequently than your bottom-performers.

At the start or end of every workday, you can instruct employees to carry out a small portion of cycle counting inventory. This can help you maintain accurate stock figures, prevent loss, and catch theft quickly.

2. The seasonal method

If you sell seasonal goods, you may want to focus on those during their prime sales periods. Instead of counting summer clothing in December, you dedicate resources to counting the items that are selling right now. This gives you the opportunity to fix errors and compensate for stock-outs while those items are still selling – otherwise, you run the risk of running out of your best-sellers right in the middle of the season.

3. The arbitrary method

Some retailers implement inventory reconciliation in a systematic, arbitrary way. You can count items based on their physical position in your stockroom, or based on specific departments, suppliers, types, and brands. You may wish to start with one corner of the store and move to each one in turn so that most of the store remains operational throughout the process.

Whichever system you choose, the best way to save on the time and labor expense of inventory reconciliation is by using a modern inventory system — specifically, one that can update in real-time. When employees need only scan an item to identify it in the company database, reconciliation moves much faster than when each employee is competing over a single spreadsheet.

Additional inventory reconciliation tips

Be organized

Keep your retail space clean and uncluttered. This make it easier for you and your staff to locate and count your merchandise. Consider taking the following steps before going through the inventory reconciliation process:

• Map your store and take note of the locations of your shelves, racks, fixtures, etc.
• Label boxes and shelves, especially if the items inside the boxes aren’t visible
• Make sure all items are in their proper places/departments.

Use the right tech

Inventory reconciliation opens up room for human error. Minimize mistakes by arming yourself and your staff with the right technology.

Counting app – For starters, avoid using a pen and paper when counting and auditing your stock. For best results, use a mobile app like Scanner, which scans each product’s barcode and then records the data into a handy CSV file.

POS/ Retail management system – Implementing a point of sale (POS) system that tracks sales and integrates with inventory can reduce human error and make theft harder to commit. With a cloud-based POS system connected directly to your stock records, sales are automatically deducted from company inventory when a cashier scans the product tag.

A comprehensive POS system includes software for scanning and tracking incoming inventory as well. Using this system, different functions of the same handheld unit can scan an item into your inventory, verify it once it is on the shelf, and remove it once a cashier scans it at the checkout counter.

The result? You’re able to streamline your store processes, reduce mistakes, and stay on top of your stock.

Case in point: Mom and Popcorn, a popcorn and candy shop in Texas. Mom and Popcorn used to manage their inventory by hand but finally switched to a modern POS and inventory management system.

According to Dave Wilson, owner at Mom and Popcorn, this move helped them save tremendous time and allowed them to streamline their store operations.

“Previously, we had to go to the front of the store to get a physical count of inventory by site, record it by hand, and then look at a paper catalog to order via the phone from the supplier. By adding this technology, we’re able to save so much time and money,” he said.

“For example, now we know there is some inventory that takes 12 months to move and we shouldn’t ever re-order it because it doesn’t move quickly enough. The technology helps us provide products that people actually want. We’ve gotten rid of around 8-10% of our inventory that wasn’t selling, and that has allowed us to bring on another 100 items that are selling better.”

Do it regularly

Keeping a tight ship around inventory requires reconciling your stock frequently. Otherwise, you won’t be able to effectively address discrepancies or issues like shrinkage.

Think about it: if you only conduct stock counts once a year, then your inventory report will have a year’s worth of discrepancies, and it will be difficult for you to pinpoint root causes of your inventory issues.

The solution? Make inventory reconciliation a regular process. If you’re cycle counting, then you need to make sure you go through the process on a continuous basis. On the other hand, if you prefer doing full inventory counts, then ensure that you count all your items once a month or at least every quarter.

Compare results with previous inventory reconciliations

Once you’ve completed multiple counts over a period of time, it’s beneficial to examine those reports so you can spot patterns. This will help you figure out why losses or discrepancies are taking place, so you can take preventive action for the future.

Comparing past reports with current ones will also help you see if your inventory practices are working. Are discrepancies decreasing over time or not? Whatever the case, the only to find out is to compare the data.

Your turn

How often do you reconcile your inventory? What’s your process like? Let us know by tweeting at us or by dropping us a line on Facebook!