Physical inventory counts at year-end are a necessary component of business if your company maintains inventory. However, if they are done incorrectly they can end up not only being difficult to perform but also misstating the company’s assets. As part of our audits, we perform observations of our clients’ inventory counts and this year we noticed errors that were costly to fix.
In order to make inventory observations effective, we recommend that companies should implement the following objectives:
Properly Train Staff and Adequate Management:
To ensure that the counts run smoothly and are efficient, the staff needs to be well trained on the procedures to be used for the counts. Staff should understand the expectations of the counts and be familiar with the inventory they are expected to count. Furthermore, management should be heavily involved in the counts; without the oversight, items can be missed or improperly counted/weighed.
Before the counts begin, all inventory should be ticketed with a tag that is pre-numbered and includes a description of the item and a blank line for the weight and/or count of the item. As inventory is tagged, the name of the item should be simultaneously written down on count sheets. Once management has confirmed that all inventory is pre-tagged, the counts can begin.
During the inventory counts, while items are being weighed and counted, personnel can fill out the corresponding line item on the count sheet and tag. This will enable management to continuously know the progress of the counts and what inventory still needs to be counted. It will also ensure completeness of the counts and avoid items being double counted.
As the counts are performed, items can at times be pulled and be counted in a haphazard manner, which can cause inventory to be missed for counting. The warehouse should be organized by like-items and the counts should be performed in a systematic manner. This will aide in the control of inventory, as well as avoid confusion as to whether an item has been counted or not.
Effective planning procedures are critical to taking a physical inventory count.
To learn more about successful physical inventory practices, contact your LSL Advisor at 714.569.1000.
Written by: Brianne Crowell, CPA