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Inventory Counting: The Comprehensive Guide for 2024

3.2 Minutes

In this article, we explore what inventory counting is and its common types. We also discuss its purposes and share our step-by-step inventory counting process. Read on to learn more. 

inventory counting

What is Inventory Counting?

Inventory counting is the process of physically counting and verifying the quantities and conditions of items stocked in a warehouse or store. It helps businesses ensure that their recorded inventory levels match the actual physical inventory on hand.

Example: In an inventory count, 150 Brand X smartphones and 200 Brand Y headphones were tallied. This revealed a discrepancy of 10 missing smartphones from the 160 units recorded in the system.

counting invntory

Types of Inventory Counting

There are numerous types of inventory counting methods used by businesses to maintain accurate records of their stock. Here are some common types along with their pros and cons:

1. Periodic Counting:

Periodic counting can be classified into annual and cyclic counts. We compare them below.

Annual Counts:

All inventory is counted once a year.

Pros: Provides a complete overview of inventory and aids in annual financial reporting.

Cons: It can be disruptive, labor-intensive, and is not ideal for fast-moving goods.

Cyclic Counts:

Different sections of inventory are counted regularly throughout the year.

Pros: Less disruptive, identifies issues regularly and spreads the workload over time.

Cons: May not be as thorough and can miss discrepancies in uncounted items.

2. Perpetual Counting:

Real-time inventory management with continuous tracking and updating of stock levels as items are received or sold.

Pros: Offers real-time tracking, minimizes discrepancies, and is typically automated for efficiency.

Cons: Can be costly to implement and depends heavily on technology, with a risk of system errors.

3. ABC Analysis:

Inventory is categorized into three classes (A, B, C) based on value/importance, and each category is counted at different frequencies.

Pros: Prioritizes high-value items and makes efficient use of counting efforts.

Cons: Can neglect lower-value items and requires ongoing analysis to keep inventory categories updated.

4. Spot Checking:

Involves random checks of certain items or sections, especially beneficial for irregularly sold items.

Pros: Quick and efficient for checking specific items and can uncover issues between scheduled counts.

Cons: It's not comprehensive and may miss broader systematic issues affecting un-checked items.

5. Double Counting:

Inventory is counted twice by different individuals or teams to enhance accuracy.

Pros: Increases confidence in count accuracy and helps identify and correct errors.

Cons: It is labor-intensive and time-consuming.

6. Physical Inventory Count:

A thorough manual count of all items in the inventory at once, often conducted annually.

Pros: Comprehensive and helps in identifying discrepancies across all items.

Cons: Highly disruptive and labor-intensive, with a potential increase in human error due to the volume of items being counted.

what is inventory counting

Purposes of Inventory Counting 

Inventory counting serves numerous purposes in business operations. Some of these include:

1. Accuracy in Financial Reporting:

Ensuring that the business’s financial records accurately reflect the actual inventory on hand. It affects the balance sheet, income statement, and cash flows.

2. Order Management:

Helps in making informed decisions regarding reordering inventory, preventing overstocking, or running out of stock.

3. Identifying Shrinkage:

Detecting losses due to theft, damage, misplacement, or errors, enables businesses to address these issues timely.

4. Operational Efficiency:

Enhancing warehouse and store management by organizing and verifying the stock, leading to improved operational efficiency.

5. Compliance and Auditing:

Meeting regulatory requirements and audit needs by providing accurate, verifiable counts of all items in stock.

6. Data Accuracy:

Validating the accuracy of data entries and reconciling discrepancies, leading to more reliable data for business analytics and decision-making.

 7. Customer Satisfaction:

Ensuring products are available for customers when needed, leading to improved customer satisfaction and loyalty.

what is counting inventory

10 Step Inventory Counting Process

Use our 10 step inventory counting process to efficiently manage your inventory. Simply follow the steps below: 

1. Pre-Count Preparation

Prepare for the count by informing all relevant staff and departments. This ensures that the inventory is organized and the counting method to be used is decided. 

Example: The management at TechStore informed all staff that an inventory count would occur on the coming Saturday. They organized all items and ensured that the inventory counting tools like barcode scanners and tally sheets were ready.

2. Schedule and Assign Teams

Create a schedule for counting and assign specific areas or item categories to different teams to ensure that the entire inventory is covered without overlaps.

Example: Team A was assigned to count smartphones and accessories on the first floor, while Team B handled electronic appliances on the second floor of the TechStore.

3. Train the Counting Teams

Provide training to ensure that all teams are well-versed with the counting procedures, use of equipment, and recording methods to minimize errors.

Example: Teams at TechStore underwent a brief training session where they learned how to use barcode scanners and the procedure to count and record the items accurately.

4. Execute the Count

Carry out the count as per the schedule, ensuring that each item is counted and recorded accurately following the predetermined counting procedure.

Example: On the scheduled day, Team A counted 200 Apple iPhones and 150 Samsung Galaxy phones, recording each item’s details into the inventory system.

5. Verification

Implement a system of verification, such as double counting to confirm the accuracy of the initial count and rectify any discrepancies.

Example: A second team at TechStore recounted the smartphones section and confirmed the initial count of 200 Apple iPhones but found 155 Samsung Galaxy phones. Thereby adjusting the initial count.

6. Data Entry

Enter the counted data into the inventory management system to ensure that all counts, discrepancies, and details are recorded accurately for analysis.

Example: After counting, the data, including the discrepancy in the count of Samsung Galaxy phones, was entered into TechStore’s inventory management system for analysis.

7. Analysis and Reporting

Analyze the counting data, focus on discrepancies, and generate reports outlining the findings, impacts, and recommendations for improvement.

Example: TechStore's management analyzed the data. They noted the discrepancy in the Samsung Galaxy count, investigated the cause, and developed a report outlining the findings.

8. Implement Adjustments

Make necessary adjustments to the inventory records to reflect the accurate on-hand quantities and address identified issues to prevent future discrepancies.

Example: TechStore adjusted the recorded quantity of Samsung Galaxy phones from 160 to 155 in the system and implemented measures to prevent future counting errors.

9. Continuous Improvement

Review the entire counting process, identify areas for improvement, and refine the inventory counting procedures to enhance accuracy and efficiency in future counts.

Example: After the count, TechStore reviewed the process and decided to implement additional training for staff to enhance accuracy in future inventory counts.

10. Schedule Next Count

Based on the analysis and improvements identified, schedule the next count, considering the nature of the inventory and the business’s operational needs.

Example: Considering the volume of sales and inventory movement, TechStore scheduled the next inventory count for six months later to ensure ongoing accuracy in stock levels.

what is the inventory counting

Case Study Example

HighTech Electronics is a retailer that initiated an inventory count to ensure accurate stock levels, optimize warehouse organization, and facilitate precise financial reporting. Here’s how they implemented our step-by-step process:

1. Pre-Count Preparation

HighTech Electronics management prepares for the inventory count by informing all staff and ensuring the products are organized and easy to count. The staff organizes all 250 Apple iPhones and 300 Dell laptops to ensure all items are barcode-labeled and easily accessible.

2. Schedule and Assign Teams

The inventory count is scheduled after store hours to avoid disruption with teams assigned to specific sections of the store. For instance, Team A is tasked to count the Apple iPhones, while Team B handles the Dell laptops to ensure a thorough and efficient counting process.

3. Train the Counting Teams

Training is provided to ensure all teams at HighTech Electronics are well-versed in counting procedures. Team A and B undergo a brief training session on using barcode scanners and the procedure to accurately count and record the items ensuring consistency and accuracy.

4. Execute the Count

On the scheduled day, the counting teams execute the plan. Team A counts 250 Apple iPhones while Team B counts 300 Dell laptops, each recording the items' details into the inventory system ensuring a systematic and accurate count.

5. Verification

HighTech implements a double-counting system to verify accuracy. A second team recounts the Apple iPhones and Dell laptops, confirming the initial count, and adjusting any discrepancies to ensure the final count's accuracy.

6. Data Entry

The counted data is entered into HighTech’s inventory management system to ensure all counts and discrepancies are accurately recorded. The data including any found discrepancies is systematically entered for further analysis and reconciliation.

7. Analysis and Reporting

Management analyzes the counting data and focus on identifying discrepancies and generating reports. In this scenario, a report noting no discrepancies in the iPhone count but five extra Dell laptops found is prepared and the cause of this discrepancy is investigated.

8. Implement Adjustments

Adjustments are made to the inventory records of HighTech to reflect the accurate on-hand quantities. The recorded quantity of Dell laptops is adjusted from 300 to 305 in the system and measures are put in place to prevent future counting errors.

9. Continuous Improvement

After the count, HighTech reviews the entire process and identifies areas for improvement. The extra Dell laptops prompt a review of the receiving process to ensure accuracy in future inventory counts and adjustments to procedures where necessary.

10. Schedule Next Count

Based on the analysis and improvements identified, the next count is scheduled. Given the minimal discrepancies found, HighTech decided to maintain the annual counting schedule. The next count is set for the same time next year to ensure ongoing accuracy in stock levels.

We hope that you now have a better understanding of what inventory counting is and how to implement our counting inventory process to maintain accurate inventory. 

If you enjoyed this article, you might also like our article on physical inventory count or inventory count procedures. 

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