5 Steps to Inventory Reconciliation- How to Save Time and Money

Inventory reconciliation is an essential maintenance routine to check the efficiency of a business' inventory control system.

Reconciling inventory is especially important to retail businesses whose stock is constantly fluctuating from shipments and transactions. Corroborating inventory reports and physical cycle counts ensures accuracy and prevents stock mismanagement.

The Effects of Inventory Reconciliation

Inventory reconciliation is the practice of periodically taking physical inventory counts and comparing it to the business's digital stock records. If the records do not match, this would reveal the presence of stock discrepancies, which need to be addressed.
Common causes for inaccuracies include-

  • Internal/External theft
  • Lack of inventory software
  • Human error
  • Improper cycle counts

Inventory shrinkage is unfortunately a common phenomenon for product-based businesses. In fact, the average American retailer experiences a 1.38% stock shrinkage rate, which adds up to nearly $50 billion worth of unreported inventory annually.

Reconciling inventory helps pinpoint the root cause of the discrepancy to prevent these financial losses. By identifying the causes of their inaccuracies, management can take appropriate measures to improve their tracking procedures and ensure effective inventory control. Benefits of reconciling inventory include-

  • Enhanced accuracy - Double checking that physical cycle counts match the digital records confirms the effectiveness of the chosen inventory management strategy. If records are inconsistent, this would signal a need for further analysis of the stock management and storage methods.
  • Increased efficiency - Reconciling inventory is a process that requires both manual and automated methods of inventory counting. When the stock tracking procedures are paired with inventory management software, taking inventory becomes quicker and more accurate, while also requiring fewer employees.
  • Consistent data - Frequently performing inventory reconciliation assures the company's inventory procedures are providing consistently reliable data. This information allows businesses to avoid mistakenly over or understocking.
  • Enhanced business functionality When a business is able to maintain accurate inventory levels through efficient tracking and consistent data, it is able to function smoothly and focus on expansion rather than rectifying stock issues.

Steps for Inventory Reconciliation

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Reconciling inventory is a hands-on process that requires attention to detail and problem-solving skills. If a business discovers a discrepancy, it is the management's responsibility to dig deeper into the company's stock numbers and procedures to rectify the problem.

Five general steps to reconcile inventory are-
1. Run physical counts - Physical inventory is the exact number of stock a business has on hand. Businesses should set aside time for designated, trained managers to perform physical inventory counts and ensure all of their individual records are consistent.

2. Compare physical stock with digital records - Once the physical counts are validated, these results should be compared with the inventory records in the system. If the figures do not correlate, the business will need to examine all of the possibilities of stock shrinkage and create a plan of action to prevent the issue from occurring again.

3. Check incoming and outgoing shipments Conducting inventory reconciliation during operational hours may introduce additional factors from incoming and outgoing shipments. This could account for possible inventory discrepancies and can be fixed by making adjustments to digital inventory records. Management should also refer back to previous stock reconciliations to confirm if they are experiencing similar discrepancy issues from the past.

4. Pinpoint the discrepancy, create a plan of action, and update records - When the discrepancy is discovered, management should create a reconciliation statement that discusses the inaccuracies and update prior stock records as well as their inventory management software. Next, the company should focus on implementing a new standard operating procedure (SOP) to prevent future incidents.

5. Repeat the reconciliation process frequently - The benefits of inventory reconciliation are lost if the process is not carried out regularly. Keeping a consistent schedule for stock reconciliation will lead to increased data accuracy and decreased inventory costs.

Utilizing Automated Cycle Counting

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Manual inventory reconciliation may seem like a daunting task as it can require companies to stop operations and plan for expenditures on trained inventory managers.

However, implementing an automated cycle count allows operations to continue by breaking up the process into small inventory groups, each counted over an extended time. Automated cycle counts can be integrated into inventory management software, barcode scanners, and point-of-sale (POS) systems. Together these processes give perpetual inventory counts by recording every order, shipment, and transaction as they occur.

Additionally, replacing spreadsheets and manual stock control systems with software can improve data accuracy by limiting exposure to human error. Accuracy will increase when software is implemented as they give real-time information. Combining frequent automated cycle counts with software prevents stock mismanagement and future mishaps, such as late shipments due to stockouts.

There are several methods of cycle counts, all of which can be automated by assigning barcodes to items and linking scanners to inventory software. Choosing an automated cycle count is unique to every company and depends on their sales trends. Common types of cycle counting include-

The ABC Method

Also known as the Pareto Principle, the ABC method breaks inventory up into three groups. Group A consists of the top-selling 20% items, group B consists of items that make up the middle 60% of profit value, while group C refers to the remaining 20% of stock.

This method prioritizes the top-performing products, frequently counting items that fall into group A and B, and provides a significant amount of stock data that can be analyzed to ensure accuracy. The high frequency of which this method is performed also significantly reduces item shrinkage and prevents theft.

The Seasonal Method

This method is primarily utilized by businesses that carry seasonal items or experience fluctuations in demand based on the time of year, as it focuses on prime sale seasons. Items that experience a high sales trend during a season are grouped and counted during this time so management can access the stock fluctuation. The increased levels of stock orders and customer transactions create an influx of inventory data on the item(s) that makes it easier for management to monitor for discrepancies.

As a business begins to expand, growing the inventory accordingly should be a priority. Taking the time to reconcile inventory provides a quality check for the established stock procedures and alerts managers of any data inaccuracies.

With this information, managers can make an informed decision about what inventory control program to proceed with in order to promote functionality and expansion. Establishing an efficient stock control system reduces expenditures and time committed to rectifying stock mismanagement.