Understanding the Inventory Audit Process

Conducting an inventory audit can seem confusing at first. Fortunately, knowing what to expect and how to break it down will have you stock auditing like a professional in no time. There are steps you can take before and during the process to simplify it for you and your business and limit the disruption it has on your workflow.

What Are Inventory Audits?

Completing inventory audits is an essential part of your business’ workflow. During an inventory audit, the financial records from a certain period of time are cross-checked with the inventory records from the same time. This will reveal any discrepancies in inventory or finances.

Often, inventory audits are time-consuming and taxing on your employees, as they have to go through every item in your warehouse and count several times to come up with the correct number. It’s often helpful to bring in a third party to confirm even further that the number is correct. These audits are well worth the investment, as they help you identify any instances of theft, damage or misplacement that have occurred over the period of time you’re analyzing.

These audits are mandatory by law for public companies that have an inventory of material goods.

The Inventory Auditing Process

There are a variety of inventory auditing methods you can choose from based on what your business does and how your workflow functions. The main goal of inventory audits should be to collect accurate and current data that’s backed up by multiple sources.

The approaches to your inventory counts can be broken down into two main methods — physical counts and cycle counts.

Physical Counts

These counts are the process of counting your inventory wall-to-wall. Since doing so is such a considerable task, it’s typically taken on once a year around the time your business’s financial statement is ending. Note that your team will have to plan for physical counts, as you’ll need to halt operation until the number is finalized, which could take some time depending on the size of your business.

Once you’ve come up with a final number, you’ll compare it to the inventory number in your system. This allows you to see and work toward fixing any discrepancies.

Cycle Counts

The cycle count method is a partial count, sampling a small portion of your inventory on a regular basis. Though a once-a-year physical count should still be part of your process, performing cycle counts often help the physical count go more smoothly and quickly.

These counts break down further into several different ways to accomplish them:

1. ABC analysis: Also known as a high-value item inventory analysis, ABC analysis helps you manage your warehouse better by grouping products in order of value — high-value items are “A” items, and the scale goes down to “C.” Determine which category a product falls in by how important it is to your business and how much it affects overall sales and profitability. This gives you areas to give the most attention to when inventory auditing.
2. Control group: This method focuses on repetition and requires you to count a very small group of products a certain number of times over a short period of time. This allows you to focus on fewer errors at a time and give them the attention they deserve before moving to the next group.
3. Random sample: Like the other methods, random sampling will make the physical count process much smoother. However, it’s less strategic and simply requires you to choose a random group of items to count frequently.

These are just a few of the cycle counts routes you can take, but they all work with small groups to speed up the physical count process down the road. The process itself should have three phases — planning, execution and analysis. There are certain variables that should be included in every business’s inventory audit process:

1. Schedule: Because auditing disrupts your regular workflow, it’s very important that you have a clear schedule that lays out exactly how long each part of the process is going to take your team. Choose when you conduct the audit based on when it’d be least impactful on your business but when the high-value inventory will still be able to be audited.
2. Audit: Using one of the methods listed above, conduct the audit itself. Having an unbiased auditor is essential. Know your business well so you know the various audits that will need to be conducted.
3. Record: Note that auditing isn’t beneficial unless you keep documentation of your findings. This way, you can compare them year by year and see growth and opportunities to fix discrepancies.
4. Report: When you’ve nailed down your findings, compile them into an audit report that’s easy to understand. If you ever find yourself in an external audit, the reports will be helpful evidence for you to present.

Planning for an Inventory Audit

Because of the disruption it’ll likely cause your business, planning your inventory audit will make a positive difference. Failing to plan well can lead to a more expensive and longer process than you originally intended.

• Timing: As mentioned, it’s incredibly important to strategically choose when you’ll perform your audit to minimize the disruption it causes to your workflow.
• Organization: Keeping an organized warehouse at all times will make the auditing process significantly easier and less time-consuming.
• Personnel: Communication is incredibly important so your team doesn’t feel blindsided by an audit. The workers you assign to the audit should be detail-oriented, patient and incredibly attentive.
• Technology: Use technology to your advantage when performing an audit. There are several inventory management systems you can use to simplify the process and automate areas that are subject to human error when possible. One technological advancement in stock auditing is the use of barcode scanning. It saves your business time and money, eliminates paper and simplifies the training process. Thanks to barcode scanning, you will be more efficient and experience fewer errors.

Learn More About Finale Inventory Today

At Finale Inventory, we provide extensive stock auditing capabilities so you’ll have complete visibility into your inventory. Through our comprehensive software, you’ll be able to quickly audit and address any discrepancies in stock logs. Learn more about our stock auditing capabilities to see how our services can help your business thrive.

Contact us today with any questions or to discover more about our inventory management system.