Is your inventory not reconciling?

Inventory is one of the most valuable assets of any company, and inventory management must be taken seriously. Inventory managements starts with effective business processes around customer invoicing and ordering, vendor and order management, record keeping and tagging, inventory counting and storage, and employee training. Effective inventory management allows business owners to meet sales and customer demands while reducing unnecessary overhead costs such as excessive inventory storage or obsolete inventory. Inventory management requires businesses to maintain up to date accounting, perform physical inventories, and reconcile physical inventories to the accounting records.


The importance of frequent inventory counts and inventory reconciliations cannot be over emphasized. Without performing these two critical internal controls, a business can quickly lose sight and control of one of its most valuable assets - inventory.


Physical Inventory Counts

During a physical inventory count, it's important that all inventory be accessible and available for the inventory count and all products should be labeled and tagged. Inventory should be counted by at least two people and performed blind. A blind inventory count will allow the counters to see the inventory SKU or item, but does not show the amount of that product in the inventory system. This prevents a lazy inventory counter from matching the inventory counted with the inventory listed.

After a physical inventory count, the results should be compared with the inventory in the accounting or inventory system. This process is called an inventory reconciliation.

Inventory Reconciliation

When you perform a physical inventory count, you have counted inventory that is on-site. However, this number might not be what is included in your books or records. An inventory reconciliation, reconciles the results of your physical inventory count to what is included in your books and records. The purpose of an inventory reconciliation is to gain clarity on the amount of inventory your business has on a certain date and ensure what is on-hand is accurately recorded.

Inventory variances are expected during the inventory reconciliation process. For example, if you have goods in transit to customers, but have not yet sent out the invoices, you may have an inventory variance. If you received products from your vendors, but have not yet issued a purchase order, you may have an inventory variance.

When you cannot identify what the source of the variance, it may indicate shrinkage.

How to stop Shrink?

Shrinkage is the loss of inventory that usually is related to factors such as theft, error, fraud, and damage. This can include employee theft, vendor theft, and customer theft. To help minimize your shrink, there are several things that you can implement.

  1. Build a culture around training. This includes having all staff that are responsible for handling inventory trained on the inventory policies and procedures. This includes how to receive inventory, how to sell inventory, how to count inventory, how to register a return, etc.
  2. Focus on Guest and Customer Service. Guest and Customer service is one of the biggest areas where shrink can occur. This is considered "Front End Shrink." Front end shrink can include your sales associates/cashiers registering a sale incorrectly by miscoding the products purchased; giving their friend a buy one get one free, or even miscounting a customer purchase. All of these instances create a discrepancy between your accounting records and the actual physical product on hand. Controls such as employee training, daily inventory counts, and sales and cash counts can help.
  3. Manage Inventory in the Warehouse. Backroom and Inventory Management is where the bulk of shrinkage problems can arise ("back end shrink"). Back end shrink can cause from inconsistencies in vendor purchasing, payments, and receipt of the actual goods. A significant portion of back end shrink can be the restriction, or lack of restriction, of inventory goods. If inventory items are not restricted or safeguarded, do not have properly labeling or storage, the likelihood of that inventory from getting up and walking out of the warehouse is high.
  4. Know your NUMBERS. The books and records state that there is $100,000 of inventory at the warehouse, but after the physical count there is $25,000. Ensure that the right information GETS INTO your accounting records and LEAVES your accounting system. Vendor purchases, customer sales, inventory write offs, all impact your inventory and need to be accounted for. You will lose thousands of dollars in lost revenue and product if you do not have your a solid grasp of your numbers and why you are having variances.

Inventory is one of the most valuable assets of any company. It is important that you take your inventory management seriously, and recognize that proper inventory management starts with effective leadership and employee training. If you are working in the cannabis industry and you have a large percentage of shrinkage, you have a problem, because you may not be able to write off your inventory loss due to IRC 280E.