Year-End Physical Inventory
As the end of the calendar year quickly approaches, many manufacturers are preparing for their year-end physical inventory, which can be a significant undertaking and disruption. However, with proper planning and implementation of the right procedures, many headaches can be avoided. While most businesses have inventory management software, a year-end physical count is essential to detect shrinkage and identify any weaknesses in your inventory management. Here are a few considerations to ensure a successful year-end physical.
A successful year-end physical inventory will rely on planning and involving various levels of management. It is important that your accounting and facilities departments work together to create a written plan. The employees performing the count should receive their instructions before the physical inventory date to ensure everyone understands the plan. During the physical inventory, your facility should be shut down with no production. Therefore, careful consideration should be given to selecting your count date and determining how many days will be required. A walkthrough of the facility should also be scheduled before the count to ensure the areas are clean and organized. Items that are identical should be moved to the same location or at least identified to ensure an accurate grand total. If your inventory has volume conversions for items in bulk, the procedures for measuring those items should be communicated to the employees to ensure consistency.
It may be beneficial to divide your facility into different sections and assign a team of employees to each section. You should appoint an inventory clerk who will be responsible for distributing, collecting and tracking inventory count sheets and tags throughout the physical inventory process.
To save time on the day of the physical inventory, you can perform a pre-count of inventory several days in advance for items already in sealed containers and not needed in production. Additionally, it’s crucial to maintain constant communication with your auditors throughout the entire process to ensure that it is arranged if they need to be on-site for their own counts.
Taking the Physical Inventory Count
At the time of the physical inventory count, it is essential to freeze all facility activities, and any goods received must be segregated and not included in the count. All movement of inventory should be put on hold, and if a particular production area needs to be started, it should be communicated in the plan to all employees. A two-person count team is recommended, where one employee counts the inventory and the other records the count tag. Inventory tags should be placed on the items counted to avoid duplication. To improve accountability, we recommend a recount of samples in each section by a supervisor.
Once the physical inventory is complete, it is important to identify any discrepancies and recount if necessary. A walkthrough of the facility must be performed by a supervisor to ensure all areas have been counted, while the inventory clerk should verify that all tags have been accounted for. This is also the time to identify, write off and dispose of any unwanted inventory that is taking up valuable warehouse space.
The results of your year-end physical inventory can provide valuable insights into your business and help you identify potential areas of weakness. If you struggle annually with your year-end physical, contact us. Dannible & McKee can work with your company to help improve and streamline your inventory process and identify areas for improving efficiency.
Contributing Author: Charla A. Roth, CPA, CDA, is an audit partner with over 21 years of experience providing auditing, accounting and consulting services. Charla specializes in working with manufacturers, architecture and engineering firms and nonprofit organizations.