Why Do I Need to Do a Physical Inventory?

Why do I need to do a physical inventory? Well, to save me money of course!

Cris Willis

My good friend Bob Negen with WhizBang! Training says, “Your inventory is the lifeblood of your business.  And you need to manage your inventory like your life depends on it – because it does.”

The amount of inventory you carry is probably the biggest asset – and the biggest expense – that you have in your business.  It is so important that you manage it well.

That being said, you need to know how much inventory you have on hand to manage it.  Your inventory will become inaccurate throughout the year due to receiving errors, breakage, theft, items being rung up incorrectly, and many other such issues.

Every retail store needs to do a physical inventory count at least once a year to keep your inventory as accurate as possible.  Once you establish the routine of an annual inventory count, you should consider adding in cycle counting throughout the year.  You want to be as accurate as possible for your major lines and bestsellers, so counting them several times throughout the year will be beneficial.

So, you may still be wondering why it is so important to have an accurate count of your inventory.

Here are 3 big reasons…

To Calculate your Turn Rate

Your Inventory Turn Rate is a measurement of how fast your inventory moves through your business.  Your goal is to efficiently generate sales from your inventory while keeping your inventory levels controlled.

To calculate your Turn Rate, you need to know your average inventory.  Many retailers do not know their average inventory over the past 12 months.  And without taking at least an annual physical count of your inventory, you will not have accurate numbers to work with.  So, after doing your annual inventory count, be sure to record your inventory levels each month by category/department.

For more information, check out How to Calculate Your Turn Rate and watch my video, Reevaluating your Inventory Part 1.

To Plan Your Open-to-Buy for your Business

Your Open-to-Buy plan starts with your Sales Plan for the business.  The next step is to know your Turn Rate.

With your Sales Plan and your Turn Rate, you can calculate how much inventory you need to have on hand each month.  So, you need an accurate accounting of how much inventory you have to know if you are under-bought or over-bought in each category/department.

If you do not have enough inventory, you will miss sales and possibly not make your sales plan.  If you have too much inventory, you can have many other problems.

Here are some of the carrying costs you need to consider when you have too much inventory:

  • Loss of cash flow as your money is tied up in slow-moving inventory
  • Warehouse space rent for extra stock
  • Stress and Labor costs of associates trying to make room and figure out where to put everything
  • Wear and tear damage on stock that leads to damages and markdowns from being shopworn
  • Clutter in the store hinders your presentation and results in less customer satisfaction
  • Paying taxes on slow-moving or dead inventory

Related: 5 Retail Pricing Strategies for 2022

To Reduce your Taxes

In many states, you pay property taxes on the inventory you have on hand as of Jan 1st each year.  Many store owners do their physical inventory between Christmas and New Year’s every year. This is a good practice because:

  • You will want to report an accurate number.
  • You do not want to pay taxes on broken items, stolen items, or all of the human errors done at the register and in receiving throughout the year.
  • You only want to pay taxes on what you actually have in stock.

In Conclusion

So, a physical inventory count is essential for keeping your inventory records accurate and current.  With up-to-date inventory records, you will be able to forecast your sales and purchases better to have the right amount of inventory at the right time.

Check out: Top 3 Marketing Plan Best Practices

For more information and training on how to conduct a physical inventory, purchase the WhizBang! Training Retail Mastery System. The Retail Mastery System teaches the foundational eleven skills that every retailer must master in order to have a successful store.  In the section that teaches Inventory Management, there is a step-by-step plan to take a physical inventory complete with videos and documentation.  Click Here for more information about The Retail Mastery System 2.0.

Cris Willis

Cris is a business coach for independent retailers. With 25 years of experience owning and operating a family business, she now guides retail owners to make smarter decisions regarding inventory management, marketing, sales training, product assortment, and more. When not at work, she loves to travel the country with her husband in their motorhome.

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