September 24, 2021

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How to Do a Physical Inventory Check Without Losing Count

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Retail spending in brick-and-mortar stores is expected to hit $5.15 trillion this year. That’s the strongest growth rate seen since 2011. 

To keep up with demand, retailers are holding more stock than ever before. The average food retailer has 33,055 stock-keeping units (SKUs). It’s no wonder the number of warehouses in the US has consistently increased year on year since 2013.

Despite the balloon increases in inventory levels and warehouse storage, data shows that retailers aren’t doing a great job at managing their stock. Some 8% of small businesses don’t track their inventory. Another 14% do it manually using a pen and paper. 

In this guide, we’ll share the benefits of tracking physical inventory, as well as how to do a physical inventory count for your retail store. 

Table of Contents

What is physical inventory?

Also referred to as inventory on hand, physical inventory is the stock you have available for purchase in your brick-and-mortar store. It also refers to an inventory management technique known as a physical inventory count, where retail staff count the store’s physical inventory and compare those levels to the inventory levels recorded in the point of sale system.

What is the difference between physical and perpetual inventory?

Physical inventory is a stock-taking method where retail employees manually count in-store inventory and adjust inventory levels recorded in the POS system if they find any discrepancies.

Perpetual inventory, on the other hand, happens when stock levels are updated after your point of sale system processes a transaction and the inventory levels for the items sold adjust automatically. If you have five quantities of inventory and one gets sold at your checkout desk, for example, your POS system will automatically update the recorded inventory levels of that SKU to four. 

Since stock levels are automatically adjusted when sales, returns or exchanges are made, retailers can opt to perform physical inventory counts less often than they would had they been using a spreadsheet or pen and paper to track inventory. 

What is a physical inventory count?

A physical inventory count is the process of manually counting the stock you carry in store—from the sales floor to the backstore—comparing the inventory levels you count to the inventory levels recorded in your POS system, and reconciling any discrepancies. Typically, inventory counts will take into account the amount of stock you have for each variant of the product as well. 

The goal of a physical inventory count is to audit in-store inventory levels and assure the inventory levels recorded in your POS system are as close to 100% accurate as possible. The way you measure your inventory levels’ accuracy is through shrinkage rate, which is the percentage of inventory missing from your POS records. 

For example, let’s say you counted 150 t-shirts in store, but your POS system only has 145 on record. This means your t-shirt inventory levels are 96% accurate and that your shrinkage rate is 4%. In instances like this where you uncover a discrepancy between recorded and in-store inventory levels, it’s important to reconcile inventory (that is, adjust the inventory levels recorded in your POS to reflect what you have in store) to maintain accurate recorded inventory levels. 

When to do a physical inventory count

It’s a smart idea to do a small physical inventory count when replenishing stock. Confirm that the total number of items (both new and existing) are accurate to give a starting point to compare future inventory checks against. 

From there, the frequency of a physical inventory count depends on a number of factors, including:

  • How many SKUs are in your inventory 
  • How many items are sold each day
  • Which physical inventory method you’re using
  • Whether you use inventory technology such as a POS system and barcode scanners

Let’s put that into practice and say you’re a small clothing boutique with 120 SKUs. There aren’t many items to count and it likely wouldn’t take up too much of your time. So, a physical inventory count every month would be the most appropriate. 

A large retailer selling thousands of items each day, however, might need to increase the frequency of their physical stock checks, but limit each count to a smaller subset of inventory (known as a cycle count or partial inventory count) to make the process faster. 

Along with partial inventory counts, it’s recommended that merchants do a complete physical inventory count at least near the end of each calendar year. This assures you have an accurate record of your inventory moving into the new year. 

The benefits of physical inventory counts

Accurate and current count of inventory 

Did you know that retail inventory is accurate just 63% of the time? Inaccurate inventory—whether the overall quantity or the stock levels for products of each size—causes a whole host of problems for retailers.

Physical inventory count is a necessary step in inventory management because it reconciles the actual stocks in storage with the inventory count on the system. If there’s a discrepancy, it means that there’s an issue. It could either be a loss of inventory or a failure to send out stocks to retail outlets.

Stephen Light, CMO and Co-owner of Nolah

It’s no wonder that for 36% of senior logistics executives, real-time inventory visibility is the area of retail customer experience they’d most like to improve on. 

Improved demand forecasting

Forecasting is an important part of inventory management. It happens when you predict how much demand there will be for a product, how quickly it will sell out, and when that SKU needs to be replenished. 

Doing a physical inventory check also helps improve inventory forecasting and purchasing. With Shopify POS, for instance, merchants can view demand forecasting reports that recommend which products to restock based on its profitability and restock rate. This enables you to restock items based not only on their popularity, but their profitability as well.

Prevent stockouts

“Sorry, this product is out of stock” is something your retail associates never want to say to potential customers. 

An out-of-stock product was the biggest reason contributing to a customers’ decision to leave a store empty handed. Those stockouts have a domino effect on sales. Take Chewy for example. Out-of-stocks meant the retailer lost an estimated $40 million in sales.

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Best Price Nutrition has 23 brick-and-mortar stores and a handful of Shopify ecommerce sites. With such a distributed inventory, its ecommerce manager, John Frigo, says, “people forget to do transfers so inventory is always a challenge. We do a physical inventory four times a year and do spot inventory checks on select brands and products included in stacks about once a month.”

If I had $1,000 to give to a lawyer, I probably could’ve had a better lease. But when you’re really under-financed, you take shortcuts.

Along with inventory counts, Shopify merchants can better control stockouts using reorder points and low stock reports. With it, merchants can see products and variants whose inventory levels are approaching the reorder point they set, and proactively order more before running out. 

Increase sell-through rate for struggling inventory

A physical inventory count doesn’t just prevent stockouts. Retailers also lower the risk of carrying unpopular inventory at full price for too long. With Shopify, merchants can access inventory grading reports that categorize products based on their cost per unit, selling price, number of units sold, and the total revenue generated over a period of time.

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For products that aren’t selling like expected, merchants can proactively consider remerchandising them in-store, promoting them to drum up interest, or applying a special discount to incentivize purchases. This helps sell-through struggling inventory to both secure a return on your initial investment and make room for more popular items that either sell at a higher volume, higher margin, or both.

Reduce inventory shrinkage

Losing inventory is a common—and frustrating—problem for retailers. It happens when your actual stock is lower than the figure in your inventory management software. 

Data shows that 18.2% of US retailers have inventory shrinkage rates of more than 3%—meaning over 3% of their inventory is lost or unaccounted for and therefore unsellable.

Employee theft and shoplifting are major causes of stock shrinkage. A weekly partial inventory count, for example, can help retailers flag discrepancies between a store’s inventory on hand and the inventory levels recorded in its POS system with a smaller sample size of inventory that’s more manageable to count (one specific product category, instance) with enough time to identify what caused the shrinkage and reconcile it.

Perpetual inventory tracking, on the other hand, won’t highlight missing stock. Should employees steal stock or items be shoplifted, your inventory on hand will shrink, but that inventory will still show as available and accounted for in the POS system. 

Avoid over or under stocking 

Failing to track physical inventory levels can result in carrying too much (or not enough) inventory, which has the potential to cause budgeting issues when not kept in check.

As of May 2020, The United States Census Bureau found that the average retail business has $1.34 worth of inventory for every $1 in sales.

That discrepancy between inventory on hand and demand (otherwise known as overstocking) for that inventory has led to more than $300 billion in markdowns. While it has applicable use cases, discounting at scale results in lost revenue as a result of lower-than-expected margins on each sale. 

By having an accurate inventory ledger and using your POS system’s reports to better understand how popular the items you carry are with shoppers, you can invest enough funds into inventory to meet demand, while avoiding overstocking or under-stocking.

Types of inventory counts

Manual counting

A manual inventory count is just that. Store associates will manually count each piece of stock both in the stockroom and on the sales floor and record the figures using a pen and paper. Most stores avoid this technique because it’s both time consuming and prone to human error. 

Electronic counting

With an electronic physical inventory count, store associates use both a barcode scanner and POS system to count stock faster and more accurately. As the store associate scans each item, the inventory level for that SKU is recorded electronically. 

Not only does this drastically reduce the risk of over (or under) counting, and also provides a digital record of each inventory count which can then be compared to inventory levels listed in the POS system for faster reconciliation.

Cycle counting

Cycle counts (also referred to as partial inventory counts) is an inventory management technique where retailers only count inventory for a particular category of products rather than doing a full stock check. 

This technique is ideal for merchants who want to maintain an accurate record of their inventory while lowering the time it takes by breaking a big task into several smaller, less time-consuming tasks. Unlike full inventory counts, which can often require retail teams to close the store or work overnight to complete, cycle counts can typically be done during the workday. 

Full inventory counting

A full inventory count usually happens at the end of the calendar year, following the holiday rush when inventory levels are typically at their lowest. Retail teams count all of the inventory in their store and start the New Year off with an accurate record that includes the total cost of goods sold and retail value of their merchandise. 

Depending on the amount of SKUs your store carries, physical inventory counts can be a time-consuming undertaking. Typically, merchants will close their store to do full inventory counts or schedule a team to work overnight. As a result, many small retailers limit full inventory counts to once or twice per year, opting for periodic cycle counting in between. 

The physical inventory counting process

​​1. Plan, prepare, and assign SKUs

Counting inventory requires precision and planning. Set a date for your stock check—be it in a week, month, or quarter’s time—and give the retail staff you schedule advance notice. If you plan to close your store during business hours, let shoppers know with an announcement on your social channels, a banner on your website, and signage in front of your store.

You should also train newer staff who haven’t done an inventory count before. Explain how to count items, the type of stock check you’re doing, and where they should record their results.

Draft a list of SKUs you’re taking stock of and divide it between your staff. For example, one person can take women’s t-shirts, another men’s shorts, and so forth. That way, each associate has a predetermined list to follow—and nothing gets double-counted. 

Finally, just before the stock check, tidy your stockroom and shop floor and give each team member enough space to count the product or category you’ve assigned them without getting in each other’s way. 

2. Count your inventory

Whether you’ve decided to close your store for the day or schedule an overnight shift for the inventory count, what’s important is that customers aren’t in the store, buying or moving products around as they shop. During inventory counts, stock levels shouldn’t be at risk of changing as a result of sales being made. Items need to be in their designated zones and ready to be counted. 

Have each employee get started on the SKUs for their individual stock check. Explain how to record the figures—either manually with a pen and paper, with a spreadsheet, or with a barcode scanner and mobile POS—and show staff how to add notes if an item is faulty, damaged, or missing a tag.

Finally, encourage each of your staff to be on the lookout for products that aren’t in the appropriate place. Designate a bin for miscellaneous items, which the team can then filter through and see if any correspond with the SKUs they were assigned to count.

3. Analyze and review

The final stage of a physical inventory count is to analyze any discrepancies between counted inventory and the levels reported in your POS system, find your shrinkage rate, and approximate the total value of the items that are unaccounted for, and the total value of the items that were counted in-store. 

Next, try to find the source of any discrepancies. For example, your inventory count might say you have 100 pairs of a flower pot, yet reports show you ordered 95. Recount the physical stock, if needed, and do some investigating to figure out what may have caused the discrepancy.

Once your analysis is complete and you’ve recorded the results, reconcile inventory levels so that what’s in-store and what’s recorded in your POS system match. 

A physical inventory count should be segmented into two buckets: physical inventory for future customer orders and physical inventory for promotional purposes and giveaways. The inventory should always remain separate and at a healthy stock rate of eight weeks of supply.

Dan Potter, Co-founder of CRAFTD

Tips for taking inventory

Create a map of your store, stockroom or warehouse

As part of your preparations, create a map of the areas where your inventory is stored—be that your shop floor, stockroom, or warehouse.

On the map, clearly label where each product category is located, and who you’ve assigned to count it. This will help the manager you’ve assigned keep tabs on who is responsible for what, and also help store associates orient themselves. Additionally, consider giving each employee a list of the SKUs they will count in their designated area; this can be a valuable point of reference as they scan product barcodes and input their count into the POS system. 

Label boxes and shelves

Alongside a map of your store, label boxes and shelves based on what products they carry—and make sure the items inside each are in the right place. These labels should reflect the store map you created in the step prior. Having a t-shirt in the shoe box, for example, causes confusion. The associate counting shoes will need to stop their count and place the t-shirt in the designated “misc” bin. Similarly, the person counting t-shirts will have inaccurate information until the miscellaneous bin is sorted.

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Treat the miscellaneous bin as less of a catch-all, and more of a last resort. Proactively labeling boxes and shelves, and ensuring products are in their designated space prior to the inventory count will keep everything on track and save time once the count is over and it’s time to account for the miscellaneous items.

Clean up areas where count is taking place

Ever heard the phrase, “a tidy environment is a tidy mind?” The same is true for inventory counting.

In each stock-taking area, make sure associates have enough room to count large quantities of product. Get rid of inventory items or boxes that don’t belong. Move any freestanding furniture—like mannequins or display cabinets—to the side.

Use barcode scanners

While manually counting items is an option, teams are more likely to miscount. Instead, opt for barcode scanners for faster and more accurate counts. 

Rather than manually counting and documenting each product in a spreadsheet or on paper, store associates scan the barcode on the product’s tag and the inventory levels associated with that product’s SKU are automatically in the POS system. Unless the store associate scans the exact same item twice, chances for miscounts are minimal. For teams tasked with counting large quantities of inventory, barcode scanners are essential. 

Our company uses a barcode scanner to count our inventory. Each of our SKUs has a unique barcode on its tag. The barcode scanner is connected to our inventory management software, ShipBob (which integrates with Shopify POS). Once we scan a product’s barcode, we’ll know it’s accounted for. Doing inventory counts this way is more accurate and helps us forecast production and purchasing schedules.

Schedule a convenient time for counting

The store needs to be closed when doing a physical inventory count. Any days you’re closed to the public—like Sundays—could be an opportunity to do a physical stock check. That way, you don’t have to turn away customers who turn up expecting to buy something.

Alternatively, some merchants opt for overnight inventory counts, scheduling a team of workers to come in when the store is closed. Just keep in mind that in many regions, overnight work requires compensating staff more than you would scheduling them for a shift during regular business hours. 

It’s also worth putting a timeframe on your inventory count. It will take some stores a full day to do a physical count, while others need just a few hours—it all depends on how many products you carry. Either way, it’s better to give yourself too much time than not enough. 

Weigh stock instead of counting it

It’s easy for retail associates to lose count of the inventory they’re taking stock of. 

Alexander Nowak is the Director of OSSEY, a fashion retailer. He explains:

“A massive breakthrough we’ve had is weighing stock as opposed to counting it—perhaps a slightly odd approach given we sell apparel and surfboard bags. However, we find counting all the different sizes and designs to be incredibly time consuming and also messy.”

Nowak adds that physical inventory counts mean they often “have to refold and package around 15% of our stock after counting. It’s sometimes tricky to get to the size labels in a tall stack of tees.” In the worst case scenario, the pile “ends up falling over or creasing”.

Weighing stock has solved this problem, he says: “By knowing the weight of a given tee or bag, we can just put a large stack of inventory on the scales (often 50+ tees) and know how many items we have in all of 10 seconds.”

Our old inventory counts used to take just shy of 1.5 hours. Around 30 minutes of that would be repacking stock, which was very frustrating, as it’s largely wasted time having to do the same thing twice. Now, by just weighing all our inventory, it takes around 35 minutes. We haven’t had to repack any stock since we started using the weighing approach.

Alexander Nowak, Director, OSSEY

Train and inform staff

Before starting a full physical inventory count, take time to train your retail staff on how to do it. Everyone on your team should understand how to use a barcode scanner and your POS system to count inventory and log results. 

Also spend some time explaining common challenges they’ll run into. What happens if an item is missing a tag, is faulty, or is incorrectly labelled? Share the answer and the process you’ve implemented for each scenario so staff know what to do if they find themselves in that situation.

Create a list of included and excluded items

Depending on the type of inventory count you’re doing, not everything in your stockroom will need to be counted. 

Prepare a list of which items do and don’t need to be counted in advance. Give each team member a list of SKUs to count and a list of those not to count. You’ll prevent people double-counting or missing important items, and have high inventory accuracy. 

Excluded items might be: 

To lower the chances of staff accidentally counting these items, it’s worth putting them in a separate location.

Leverage inventory management technology

Counting with pen and paper isn’t just time consuming. It’s easy to miscount and end up with inaccurate inventory information. Plus, a physical stock count over several store locations will churn out more data, which will take much longer to analyze and make sense of than if everything were recorded using software built for managing inventory.

Inventory management technology solves those problems. Using both Shopify POS and a barcode scanner, for example, merchants can scan the items and inventory levels for that SKU will be automatically logged in the point of sale system, which makes for quicker inventory reconciliation and gives merchants a single source of truth for both inventory and their financials.

Apps like Stocky also notify you when stock is running low. Set reorder points for products and, once inventory levels approach that threshold, you’re notified that it’s time to reorder before inventory levels reach zero. 

If you want to minimize the number of stock counts you do annually, using a POS system that supports perpetual inventory management can help. Shopify’s automated inventory adjustments whenever products are received, bought, returned, or exchanged online or in-store has helped brands like elph ceramics cut the time it spends on inventory management by 30 minutes each day.

The amount of times I have to do a stocktake is close to never. I still do stocktakes, but before, I had to check our stock at the end of each day to identify what I sold and then update our online stock. With Shopify POS, it’s all done for me.

Keeping an accurate count of inventory at your store

As you can see, the day you do a physical inventory count doesn’t have to be one your retail associates dread. By clearly organizing and labeling where products are located, having a process in place, and using the right tools, stocktakes are more likely to go smoothly and errors due to miscounting or misplaced items are kept to a minimum. 

Follow these tips to assure your next inventory count—whether it’s a cycle count or your annual physical inventory check—is well-executed, helps you address inventory shrinkage, and keeps an accurate ledger of the quantity, cost, and retail value of the inventory you carry in store. 

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