Inventory Counting: Step‑by‑Step Guide on How to Conduct and Access the Results

Inventory counting or stock-taking is the actual recounting of all assets and property listed on the balance sheet of a company, including tangible and intangible values, such as raw materials, finished goods, etc.

The purpose of inventory counting is to find discrepancies between the actual availability of goods and the data in the organization’s recordings. To avoid stopping sales, many businesses arrange regular stock-takings and process the results on a day off or even at night. Let’s examine how to conduct inventory counting — manually or digitally, on an as-needed or recurring basis.

At the end of the article, you’ll find the inventory counting checklist which will help you to set up the entire stock-taking flow and not to forget a thing.

The Very Beginning of Inventory Counting

To start with, you must be prepared for the fact that stock-taking will require additional resources — time and money. This includes:

• Distracting store and floor employees from their primary duties;
• Additional payments to staff for overtime work;
• Lost profits due to the suspension of trade for the duration of the check.

If the company consists of one person, during the inventory counting, they will have to perform several functions simultaneously: a director, a warehouseman, and an accountant. Therefore, it is important for every entrepreneur to know how to properly conduct stock-taking and document its results.

Stock-taking benefits are evident. This procedure is necessary to timely find out the following issues:

• Stockouts or inventory shrinkages that can deprive you of sales, and lead to forced returns;
• Overstocking can increase warehousing expenses for storing items, and in case of perishable goods leads to multiple write‑offs;
• Dead stock — items which are not likely to be sold soon due to the season, quality, popularity, etc.

Assets Checked during Stock‑Taking

There are several categories of things subject for inventory counting:

• Raw materials;
• Finished goods;
• WIP (work‑in‑progress);
• Equipment;
• Tools, spare parts, and cleaning supplies.

As material, as intangible assets can be checked.

Types and Techniques of Inventory Counting

The types of inventory counting depend on the goals and specifics of the procedure. Let’s consider all classifications.

Inventory Timelines

As a rule, in a store and warehouse, the inventory counting is conducted every month — to control the work of the staff and the overall state of the assets. If you apply such a control mechanism, you can assess the quality of employees’ work, timely identify scrap, and remove from the product range those items that, for some reason, do not sell.

The head of the organization determine:

• The number and dates of stock-takings in the fiscal year;
• The list of property to be checked;
• Financial obligations for each check.

Some businesses use inventory cycle counting. It’s one of the best inventory practices when a small amount of inventory is regularly checked at a specific time. For instance, a sports equipment shop checks the stock of dumbbells every Tuesday, and fitness balls — every Wednesday, once a fortnight. The advantage of this approach is that it doesn’t require as much effort as formal stock-taking and can help identify discrepancies promptly. Stock cycle counting can be of different types and techniques.

ABC Cycle Counting

All goods are divided into three categories in which particular inventory counting rules are determined.

• A — the highest in demand, cycle counting every week or month
• B — the mid‑level demand, cycle counting every quarter or trimester
• C — the low‑level demand, cycle counting every half a year or year

Not only demand can be a decisive factor for classification but also storage space in a warehouse, price, etc.

Random Sample Cycle Counting

When a company has a large number of similar items (beads, glass beads, paste) it’s convenient to conduct counting randomly and often, e.g. Monday — beads, Tuesday — glass beads, Wednesday — paste, etc.

Control Group Cycle Counting

A certain group of items is chosen and is calculated repeatedly a few items over a brief span to detect any discrepancies. This practice will also uncover any flaws in the counting method that could lead to inaccuracies. Continue this process until all counting discrepancies are rectified.

Opportunity-Based Cycle Counting

It may be convenient to check items at a specific time in a company’s logistics timeline. When the goods are at the reorder point, processed in the warehouse, or transferred from one point of sale to another — these are some examples of the method.

The List of Financially Liable Employees

Usually, the following people are materially responsible for the inventory assets:

• Cashiers;
• Salespeople;
• Warehouse keepers;
• Couriers;
• Managers and their deputies;
• Directors, heads, and administrators of the organization and its divisions.

This condition is stipulated in the employment contract. Financially liable employees participate in the checks of the values for which they are responsible for safekeeping.

Inventory Counting in 2024: Step‑by‑Step Guide

Stock-taking in a store and warehouse essentially involves counting and assessing the availability of goods. If any problems with the quality or quantity occur, the corresponding inventory counting documents must be made, and then related operations should be conducted such as write-offs and stock adjustments. This is usually followed by the decision to recover damages from financially liable employees. However, it depends on the inner policy of a company.

The process can be quite complex, especially for beginners, so we have developed a table that visually guides you on how to conduct inventory counting.

Let’s examine the stages indicated in the table in detail. Disclaimer: we are going to scrutinize the usual way of conducting stock audits. However, its stages can depend on a particular legislation of a country and the company’s inner rules.

Step 1: Preparation for Inventory Counting and Assembly of the Commission

Inventory counting in a store or warehouse usually begins when an order for stock-taking is issued, which must be signed by the manager or owner of the company.

Next, a special commission must be formed, which is composed of administrative and managerial staff. Sometimes representatives of the internal audit service and experts from independent auditing organizations are also included. Financially liable people, such as salespersons or warehouse workers, cannot be members of the commission but must be present during the inventory.

Let’s look at the requirements in more detail.

In trading organizations sometimes this process starts unexpectedly for salespeople and warehouse workers — employees don’t know anything until the commission arrives at the store or warehouse. After that, the sale and movement of goods subject to inventory are prohibited. That is, either the entire warehouse or store must be closed, or just the audited department and the cash register in the department.

Stock audits at the warehouse and the retail outlet differ in that counting goods in the warehouse is much more difficult than on the store shelves, so it takes more time and effort. To simplify the process in a large store, you can create an inventory audit plan, for example, according to the layout of the goods. In this case, after the inventory counting, you can directly record the actual quantity of products on it. This method is convenient for its clarity.

Step 2: Conducting the Inventory Counting and Recording Its Results

During the inventory counting, the commission checks not only the quantity of goods but also their quality, storage conditions, and expiration dates. To record the results, a document on the actual availability of valuables is created, listing all goods by groups with the indication of an item name, SKU, UOM, its variants, serial numbers, batch numbers, and other characteristics that enhance the accuracy of inventory management.

Depending on the types of products presented in the shop and stored in the warehouse, procedures such as control weighing, measuring, and others are introduced in addition to counting.

If the stock management processes in your organization are automated, then the check is faster — stock data is printed from the software and compared with what is available on the shelves and in the warehouse.

This way, you can quickly detect shortages or excesses during the stock-taking. For this purpose, Kladana ERP is a convenient solution that will help maximize the speed of the check.

Step 3: Reconciling Actual Data with Inventory Records

Following the inventory check, the completed inventories are usually submitted to the accounting department. There, a reconciliation of the actual goods in stock with the data from the inventory management system will be conducted.

If there is no accounting department, the general director or the company owner substitutes the accountant.

Step 4: Summarizing Inventory Counting Results and Reflecting Them in Inventory Management System

At this stage, when there is a clear picture of the discrepancies, the manager issues an order to approve the results of the inventory. Based on this, it is possible to recover damages from the responsible parties and make the corresponding entries in the records.

Simultaneously, the accountant records all final figures and data regarding surpluses, shortages, waste, and sorting errors.

Surpluses and Shortages during Inventory Counting

Reasons of Inventory Discrepancies

As to the reasons discrepancies occur, there are a few most common:

1. Human factor

Sometimes employees may lack knowledge, instructions, and training on how to manage inventory items — receive, store, transfer, and track. Let’s consider a couple of examples:

• An item has been returned but there are no records in the inventory system, and the product is considered to be sold;
• Products in a batch expired and were just thrown away without being correctly written off.

2. Outdated equipment & software

Malfunctioning or outdated tools & equipment (e.g. barcode scanners) may multiply errors. Inventory management in spreadsheets or paper notebooks can pile up these errors even more. The widely spread stock management mistakes are the following:

• Labeling items with wrong barcodes;
• Mixing up SKUs of different products;
• Storing goods in wrong locations and storage bins.

3. Theft & fraud

Warehouse staff can be involved in theft, as well as customers in a shop. Also, suppliers can use some fraud schemes.

Resolving Inventory Discrepancies

Now, let’s move on and learn how to deal with inventory discrepancies.

1. Recount stock once again if possible.

2. If you get the same results, analyze the reasons why stock shortages or excess occurred. Check whether recent inventory operations were conducted correctly: receiving, storing, shipment, etc. Pay attention to products’ SKUs, barcodes, and variants.

   During inventory counting, sorting errors are sometimes discovered — this is a simultaneous surplus and shortage of goods of the same name but of different variants. For example, according to the stock records, there are 6 boxes of Basmati rice and 4 of Jasmine rice in stock. However, during the inventory, it turns out that there are actually 3 Basmati and 7 Jasmine. This situation indicates a sorting error. In this case, it’s necessary to determine whether the goods are of equal price. In stock management, the amount by which the shortage exceeds the surplus is written off to financial results.

3. Make corresponding records in your inventory management system. Discrepancies identified during stock-taking, whether surpluses or shortages, need to be documented as income or expense.
4. Depending on the results of the analysis, resolve the issue. Sometimes, shortages during inventory counting are written off as customer theft or inventory management errors. Significant shortages for the organization are paid for by the person responsible for the material assets.

How to Reconcile Discrepancies

In most cases, employees responsible for shortages bear the liability — the missing sum can be deducted from their wages. However, the decision based on the results of the inspection is made by the management, and in practice, shortages are often written off as costs, especially if they do not exceed the established norms of the organization. Minor discrepancies are normal for any enterprise.

Surpluses can be attributed to the performance of the enterprise. In case of their occurrence, it is necessary to identify who is responsible, as surpluses also lead to discrepancies. Any results of the inspection — both positive and negative — are recorded in reports.

How to Consider the Human Factor in Inventory Management

Regular inventory auditing is necessary for the timely detection of employees’ dishonest actions and errors associated with the human factor.

Inventory mustn’t be just a formal event but a way to obtain information that reflects reality. To achieve this, it’s important to observe two conditions:

1. Inventory should not increase the workload of the staff

If you assign a regular employee to conduct inventory counting, relieve them of their direct duties during this time. Alternatively, engage an external specialist to perform the check.

2. The purpose of the inventory counting is to conduct accurate counts and summaries of the stock, not those that are favorable to the employees conducting the recount.

To avoid manipulations with goods and false information in documents, outsourcing services are a better choice. An employee who is not personally interested in the results of the inspection will not hide the real indicators and report false information.

Inventory Management Automation

Automating stock management simplifies the business processes significantly. You always know how much stock should be in your store or warehouse. When you enter the actual data, you can quickly identify any shortages or excesses, both in terms of quantity and monetary value.

However, closing a point of sale or department for inventory counting means temporarily halting sales, so it’s important to carry out the process as quickly as possible. This problem can be solved through automatic stock-taking.

To avoid errors leading to misplacement and excessive paperwork, you can automate the compilation process with Kladana. To do this, connect our software to a data collection terminal. You just need to scan the barcodes of products in the warehouse. The system automatically searches for discrepancies and then generates an inventory list. In Kladana, you can also download or fill out online all the documents needed for inventory counting: stock and stock movement reports, product cards, and others.

Inventory Counting Checklist

To sum it up, let’s revise the learning material and create a handy stock-taking checklist:

✅ Choose inventory audit method — in case of cycle counting, opt for ABC analysis, random sample, opportunity-based, or control group

✅ Create an inventory counting schedule — how often you are going to check your stock;

✅ Determine stock-taking stages and procedures that you’ll follow, and make corresponding inventory counting documentation;

✅ Determine people who will participate in inventory counting, make sure they know the entire procedure and their roles;

✅ Close your shop or stop all warehouse operations during inventory counting;

✅ Make thorough stock-taking and do recounting if needed;

✅ Make corresponding recordings in your inventory system and don’t forget to deal with discrepancies;

✅ Think of inventory counting improvements.

Frequently Asked Questions on Inventory Counting

Let’s explore the most common questions that novices often have when they are eager to conduct inventory counts.

What is the counting process in inventory?

Inventory counting is checking whether data in your inventory management system (software, spreadsheets, or notebook) match your physical stock. In case of discrepancies, they must be analyzed, and the recording corrected — write‑offs and stock adjustments must follow.

What counts as inventory?

Inventory includes all goods that a business intends to sell or use in production. This can range from raw materials and work-in-progress items to finished goods ready for sale.

What is cycle counting in inventory?

Cycle counting is a method where inventory is counted in small portions over time, rather than conducting a full inventory count at once. This approach allows for regular checks and balances without disrupting daily operations.

How often should inventory be counted?

The frequency of inventory counts can vary based on the business size, type, and volume of transactions. Some businesses do it annually, while others may find monthly or quarterly counts more beneficial. High‑value or fast‑moving items might require more frequent counts.

How do you plan inventory counting?

Planning inventory counting involves scheduling the count, training staff on counting procedures, organizing inventory beforehand, and ensuring all necessary tools and resources are available. Divide the inventory into manageable sections and decide on a counting method that suits your business operations.

How to deal with discrepancies in inventory counting?

When discrepancies arise, recount the affected items, investigate the cause (such as theft, damage, or administrative errors), and correct the inventory records. Implement measures to prevent future discrepancies, like improving security or refining record-keeping practices.

Should I fine employees in case of discrepancies found during inventory counting?

Fining employees for inventory discrepancies is generally not recommended as it could harm morale and may not address the root cause of the problem. Instead, focus on training, and process improvements. Investigate discrepancies thoroughly to understand their origins and take appropriate actions to prevent recurrence.