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Inventory Reconciliation Guide For Beginners – How To Do It And Why Do You Need It

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If you are in the retail business, you have probably dealt with inventory records that don’t correspond to the number of actual goods you have on hand. Inventory reconciliation is required in this case, which entails comparing your inventory records to your actual stock levels.

Even though necessary, counting, identifying, and resolving inconsistencies and reconciliation of inventory can waste valuable time that would instead be spent on making sales. Luckily, there are best practices and inventory reconciliation steps you can take to make the process faster and more efficient. 

What is Reconciliation of Inventory?

As a store owner or retail manager, you must make sure that the recorded inventory count corresponds to the actual inventory you have on hand. 

The process of syncing your stock records to ensure that the things listed in your system match what you actually have in your store is known as inventory reconciliation. It involves physically counting the products you have and comparing the results to the stock figures that have been recorded. 

Stock records are updated to ensure that they reflect the actual physical stock count whenever differences are discovered. The method also tries to identify the causes of these inconsistencies and put policies in place to resolve them and stop similar occurrences in the future.

How Does Reconciliation of Inventory Work?

The process of reconciling inventory takes time and effort. The specifics of the inventory reconciliation process will differ from one store to the next, but generally speaking, retailers will take the following inventory reconciliation steps:

Counting products

The first step ​​is to close your store’s doors to the public for several days. Spending some time organizing your physical retail area might be beneficial for making the process easier. Proper planning in advance can save you lots of time over the course of the inventory reconciliation process. 

Once you’re all set, the entire team starts counting and recounting the products in order to provide the most recent, accurate figures. 

Comparing records

The second stage after determining the most recent count for each product type is to compare your numbers. Using an inventory management system or a spreadsheet, the business owner verifies the actual inventory numbers with the records for the stock that is now on hand.

The goal is to identify any differences by examining and confirming that the data and the products that are currently at hand coincide.

Addressing missing items

The third step of the inventory process involves determining the cause of stock shrinkage that is otherwise unaccounted for. Try to determine the cause of any disparities you find between your recorded and actual stock, which is frequently the case. 

You can investigate a number of problems to attempt and determine what is causing the problem. Human error, unrecorded items, supplier fraud, missing paperwork, scrap items that have been sold, stock theft, or backflushing are a few common causes.

Figuring out the reasons behind discrepancies

Finding an error is not enough; you also need to investigate how and why it occurred, who was at fault, and what you can do to stop it from happening again. This calls for the retailer and their staff to carefully review the sales records to look for instances of missed sales, calculation mistakes, or lost receipts.

If you suspect theft or supplier fraud, you’ll need to interview members of the inventory management or sales teams and examine inventory deliveries and shipments since the last reconciliation. Finding the offender is not certain, so you might just have to accept inexplicable shrinkage as a fact of life despite your best efforts.

 Ensuring your records match

The final step is to update your stock records to reflect the actual inventory count that is now present in your business.

To accomplish this, you must first develop an inventory reconciliation statement that explains the causes of your stock difference, then you must update your previous figures to correctly reflect the physical count.

Inventory Reconciliation Methods

The methods listed below are reconciliation strategies that make use of cycle counting. Look over these inventory reconciliation techniques to see which one suits your company best.

Arbitrary method

You can do inventory counts based on how your inventory is categorized in your POS system or organized in your retail store. You can also time when you count and reconcile inventory on whichever day your store generally conducts the fewest transactions. Because the manner you count inventory is completely up to you and not based on a predetermined set of criteria, it is known as the “arbitrary method.”

Seasonal method

If you want to use this method, you’ll need to perform inventory counts based on the seasonal demand for a product. For instance, if you run a shoe shop, you would count your inventory of pumps and sandals before the spring/summer season, and your inventory of boots before the fall/winter season.  

The seasonal method ensures that your stock on hand is accurate before you predict demand for that product category, send purchase orders to vendors, and stock up in advance of peak season. 

ABC method

The ABC method, also referred to as the Pareto Principle or the 80/20 rule, arranges your inventory reconciliation according to the proportion of total sales each item represents. Products that generate 80% of your company’s revenue are considered to be A-grade inventory, those that generate 15% of your revenue are considered B-grade inventory, whereas items that generate 5% of your sales revenue are C-grade inventory.

Retailers who adopt this method would count their A-grade inventory more frequently to ensure they always had stock on hand because it makes up the majority of their revenue. For instance, the ABC method might be used to count the inventory of Group A once a month, Group B once every quarter, and Group C semi-annually.

Reconciliation of Inventory Best Practices

Regardless of how you decide to count and reconcile your inventory, the whole procedure will be simpler for you and your team if you follow these best practices.

Count your inventory frequently and consistently

Counting and reconciling inventory shouldn’t be something that happens once a year. The likelihood of having correct records increases with the frequency of inventory counts and reconciliations. In order to proactively monitor and mitigate shrinkage, think about cycle counts in between larger stock counts.

Organize the inventory before you start counting

Before you begin counting, be sure that your physical inventory is meticulously arranged, and think about performing a store-wide clean, including your sales floor and storage facility. Label the boxes and shelves in your stockroom, and make sure everything is in the right place so that counters can find it easily. 

Compare shrinkage rates after counting

It’s crucial to calculate your shrinkage rate and compare it to previous counts. If your shrinkage rate is increasing, you might want to consider monitoring your inventory more closely and being on the lookout for theft. If the shrinkage rate is declining, it’s a good sign because it means you’ll have more money to pay for variable or fixed expenses. While shrinkage occurs in some form in most retail establishments, try to keep it under 1%.

Use barcode scanners

Manual counts are possible, but using a barcode scanner greatly speeds up and simplifies inventory counting. As soon as an item is scanned, stock levels for that SKU are recorded in digital form, and you can use your POS system to reconcile any shrinkage.

Invest in inventory management software

Using a pen and paper when counting and reconciling inventory increases the possibility of making avoidable counting errors. In addition, compared to digital data, it takes much longer to look through paper records and keep track of prior inventory reconciliations.

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Why is Reconciliation of Inventory Important

Reconciling your inventory is a crucial step in optimizing the operations of your retail. Here are a few reasons why it is important:

  • Avoid overstocking. By ensuring that your stock records are accurate through the inventory reconciliation process, you can avoid placing unnecessary orders for new products when there are already items to sell on the store shelves or in the warehouse and make sure you don’t end up with excess inventory.
  • Avoid stock-outs. A stock-out is a situation where shoppers place orders for products that are listed as being in stock when there is actually not enough inventory to fill the demand. Due to this mistake, you might lose customers to competitor businesses.
  • Demand forecasting. Reconciling your inventory helps you create records of your products, both present and past. You can use this information to forecast future demand, assess how various product categories are doing, and better plan your inventory.
  • Reduce the risk of fraud and theft. It is less likely that there will be theft, backflushing, or fraud when you have exact records of every item entering and leaving your store.

The Bottom Line

By regularly counting and reconciling your inventory, you can ensure you always have an accurate inventory record on hand. As a result, reporting is more accurate, which leads to more cost-effective stock replenishment. In other words, reconciliation of inventory makes sure that, if you’re losing money to shrinkage, you’re aware of the issue and can find a solution. It also helps you make better use of the money you invest in inventory.

Integrating your business with an inventory management system is a great way to gain real-time inventory counts, automatic reordering triggers, and automatic inventory syncs that reconcile your stock in real-time and speed up your processes.