Many companies I work with do an annual or semiannual inventory. But so often they aren’t truly reaping the rewards, nor are they making changes to internal processes and procedures to optimize their inventory control.
For more information on conducting a physical inventory, I got in touch with a former colleague, Greg Levy. Greg is the chief financial officer of Palladeo, a leading design, retail strategy, décor fabrication, and construction partner for America’s top retailers. Levy states there are three main reasons for conducting an inventory:
- It increases the accuracy of inventory amounts, which allows you to more accurately manufacture or sell items as well as purchase new items.
- It allows you to fulfill client orders, increasing customer satisfaction and retention while meeting sales requirements.
- It allows you to increase the financial integrity of the business, including increasing cash flow and reducing inventory carrying costs.
Levy told me Palladeo was able to reduce its inventory carry costs by 25 percent by implementing an inventory control system predicated upon performing physical inventory.
Taking a physical inventory one step further, a resort client I have is conducting monthly inventories, as the new chief financial officer attempts to fix the bugs in different systems that all have to work together to report the data accurately. A pain for the employees, but the CFO so strongly believes in getting this right that it’s mandated, not an easy task to accomplish on a monthly basis for a property with multiple restaurants, retail spaces, and more points of sale with thousands of SKUs.
How Do You Conduct a Successful Inventory?
Planning is critical. The entire company needs to be on board, with specific instructions for counters and clerks and specific responsibilities assigned to individuals. From that point, the facility or store should be cleaned and a specific holding/receiving area set up for new inventory that arrives but won’t be put into the system until after the physical inventory is conducted. The most important step is for a date to be set when nothing is input into the system: new orders, inventory edits (reductions/additions), cost adjustments, and so on. That’s going to require a little planning to keep the business moving forward while inventory is frozen, but it’s fairly easy to do so.
One of the biggest issues is that many companies don’t double count. Meaning one person counts and marks the inventory for each specific item without a double check. The most successful and accurate inventories have one person count and another person recount the same items. Or one person counts and the other person logs the information. Regardless, having one person do it all always results in mistakes and leads to a less than 100 percent accurate inventory.
You Conducted the Inventory, Now What?
So often businesses conduct inventory because their accountants or auditors require them to do so. But doing for the sake of doing doesn’t make your business financially stronger.
The financial team needs to gather the data and make the adjustments to the general ledger. That goes without saying. More importantly, the management team should be sitting down and going through the data, questioning everything, including processes and procedures to determine how well they’re working (or not working).
This is the biggest issue according to Levy. “The devil is in the details. Questions like ‘Why does product category D have the largest adjustment value?’ or ‘Why does supplier Z have the largest quantity and dollar value adjustment?’ are generated by analyzing a well-done physical inventory and lead to increased efficiencies and improved margins. In this time of downward pressure on margins, a physical inventory can be a critical component in the success of a business,” said Levy.
Companies that identify issues and set up processes to improve them find that they strengthen their financial outlook because a more accurate inventory enhances cash flow while reducing inventory carrying costs.
How are you improving your company’s financial status through more accurate physical inventories?