To many it is a dirty word, but most businesses understand that “taking inventory” is a necessity and must be dealt with. The frequency of it is often determined by the industry and it ranges anywhere from once a week to once a year. But Inventory is an extremely important tool and when managed properly will not only add to a companies profit line, but contribute to keeping your cash flow lower.
Many dread the process. It can be very lengthy and tedious. We thought it would be helpful at year end to pass along some tips to help make this process more efficient for you. Simply put, the more organized you are, the easier and quicker it goes and the better you do it, the more you know where your money is. When working with clients, I often offer to do an inventory with them. They usually jump at the offer for help, and it gives me great insight as to how they run their office and thus lets me know where to dig in deeper. The goal is usually to do a better job with Inventory and save them time doing it. I have listed those things I look for below.
Inventory is a process; don’t view it as a task. So many look at it as a one time task of counting what’s on hand. That part of the process is referred to as the Physical Inventory, but it should not be viewed as the only component. What leads up to, and happens after the Physical Inventory is equally important in the process and each adds to the efficiency of the other.
Why is this process so important?
Inventory takes a lot of time to perform correctly. What if you could save ½ hr or more every time you do it? I save most people at least an hour by having them follow the steps below. Oh, and also….this is money were talking about. Inventory is important because the dollars it identifies are vital when figuring out your product costs, so the more detailed the collection process, the better your product costs look.
If you don’t have everything I list here in place, it may take a few months of implementing to really see the effects of how much time it will save you.
Here are what I refer to as the 4 components of the Inventory Process;
- Establishing what needs to be in your inventory ahead of time helps streamline the counting process.
- Establish Product specifications and Order guides to insure consistent ordering.
- Have Vendor agreements to insure pricing, quality and consistent supply.
- Have Production systems in place that can establish pars on items needed to inventory. Keeping inventory as low as possible to meet demand.
- Organizing storeroom logically and insure items are located together.
- Establish product pars to insure adequate space is available.
- Create Physical count sheets to mirror storage to accelerate counting process. (see “Shelf to Sheet” below)
- Have someone clean and organize store room prior to counting.
- Create different count sheets for different store rooms and consolidate like items at the end of the counting process (not during)
- Label and date to help insure proper rotation (everything has a shelf life)
- Limit access and secure storeroom when not in use. (Key control)
- Minimize storeroom personnel to ensure consistent receiving and control
- Limit who receives orders and handles invoices
- Perform account receivable tasks as invoices are received
Pre- Physical counting
- Ensure the most current price is on the Inventory extension sheet (Master Spreadsheet) for each item (changes by industry) and that it is done prior to Physical counting day. Account receivables need to be up to date at time of Inventory counts. Doing price changes at the same time is proven to not be efficient.
Post Physical counting
- Review and tally all Physical count sheets. If products may be found in multiple spots, consolidate to one number to enter on the Master spreadsheet. Doing this ahead of time will expedite the data entry AND begins the analytical process.
- Enter counts in Master spreadsheet to allow for calculations (referred to as “Extensions”)
- Review extensions and look for obvious errors. – Key miss-types or entered as “each” but priced by “case” would be one of the more obvious
- Analysis of inventory by category totals and comparison to prior inventory. Look for any major differences, variations, or trends.
Depending on the industry, I generally advise establishing an acceptable variance by Inventory category becomes established. If over the “acceptable” variance (5%?) then have the manager report as to why.
Other key points that will help your Inventory process
- Make sure how it is being counted is consistent with how it is purchased, used or stored. If it comes in a case of 100 ea., yet they are only used 1 at a time, then break the sheet down to an “each” price and inventory them by the “each”.
- If it is purchased by the pound, then make sure there is a scale available when inventorying occurs. Do NOT assume each one is a given weight. There is a reason why the maker doesn’t price the product this way.
- The Physical Count process needs to be completed at a designated time when no product will be entering or exiting the storeroom(s). Often done after hours or before business start for the day. If you have multiple units doing individual inventories, it is important to insure they all do it at the same time, otherwise performance comparisons are difficult.
- Utilize “Shelf to Sheet ” – a 2 party system during physical inventory. Inventory is not about filling in what is on the count sheet; it is about capturing the money on the shelf.
Process -One person starts in the upper corner of a storeroom and calls to the second person. The person calls what item it is and how many there are. The second person finds the item on the count sheet and writes down the amount. If they don’t find the item on the sheet, they write it down separately to be added at the end of the process. The first person then goes to the item adjacent to what they just counted and calls that item off etc. This is done throughout the storeroom and is a methodical way to ensure everything is accounted for.
- Make sure Physical counts are never taken while someone is sitting at their desk. Mistakes happen and this is why they call it “Physical” inventory.
- Lastly for proper control a non Ordering/Receiving person should be involved in performing the physical counts also. This is a common Risk Management practice plus; people that touch these products everyday are more likely to make assumptions/mistakes during a lengthy Inventory process.