Inventory Reconciliation: A Step-by-Step Guide

As a business owner, can you ensure that your customers get what they need when they need it? Do you always have sufficient inventory on hand to meet demand?

Many a time, there is a discrepancy between inventory count on record and the actual stock in the warehouse. This can be embarrassing, especially if you have to fulfil a large order.

In 2021, the average inventory shrink rate in the U.S. was estimated at 1.4%, which contributed to nearly $94.5 billion in losses, according to the 2022 National Retail Security Survey conducted by the National Retail Federation.

Even leading retail brands struggle with inventory mismatches and shrinkages.

How can you prevent such a situation and get the inventory on record right?

You need to periodically reconcile your inventory.

Let’s understand this in detail.

What is Inventory Reconciliation?

Inventory reconciliation is the process of comparing your inventory data with what you physically have in stock. Such a comparison of physical inventory and data records helps a business identify discrepancies.

The process involves an in-depth review of physical inventory of different materials and their quantities. This can either be done manually by employees or automated with the help of inventory management software.

The process also involves investigating the cause of discrepancy and making necessary adjustments in records. The discrepancy may be because of human error or a simple miscalculation. It may also be because of missing paperwork, unlisted items, theft or supplier fraud.

Reconciling inventory is vital for businesses of all sizes. It helps them tighten internal control, better manage inventory and ensure the accuracy of their accounting records. It can also help identify gaps in inventory management processes.

In most businesses, this process is performed on a regular basis and involves various stakeholders.

Also read: 6 Critical Inventory Management Capabilities Your Enterprise Needs Right Now

How Businesses Approach Inventory Reconciliation

Inventory reconciliation can be a tedious, time-consuming exercise. Small and medium-sized enterprises have to shut down operations for a few days or work past usual timings to count physical inventory. Some companies engage in ‘cycle counting’ to spread this process over a period. Counting is done over an extended period to make it easier for the staff to check and count inventory.

Cycle counts can also be automated and integrated into inventory management software, barcode scanners and point-of-sale systems.

Another approach is to break the process down by priorities. Products are grouped into categories A, B and C based on their value. Category A is high-value inventory that includes top-selling items. This category is counted more frequently as it has a greater impact on the business. Moderate and low-value inventory products are grouped in category B and C respectively and counted less frequently.

Steps Involved in Inventory Reconciliation

1. Count the physical inventory in stock and determine the quantities of different items. Employees can use barcode scanning and RFID devices for this process.

2. Compare the count of physical inventory with accounting records to check if they are in agreement. Check if any changes in quantities and values are updated in records. For items that do not have any serial numbers, check supplier invoices.

3. Identify discrepancies, if any, and investigate the cause. The objective is to determine the underlying cause and prevent the issue from occurring again.

4. Address the discrepancy to prevent inventory mismatch in the future. Often, steps get missed in the recording process. Sales records and receipts may be missing. If sales records do not explain the problem, check with employees responsible for inventory operations. Do not spend too much time in this process. Remember that if the number or value of missing inventory is small and negligible, it may be a better choice to ignore the shrinkage instead of engaging in a time-consuming investigation. At other times, you may launch an enquiry but not succeed in finding the cause of the gap in inventory. You know that a mistake has occurred somewhere in the process but cannot determine what it really is.

5. Reconcile the inventory record to match the actual count, even if you cannot determine the cause of discrepancy. Some of the gaps can be difficult to explain, especially if related paperwork is missing. In such a case, the wiser choice is to reconcile and move forward. The error may be found later down the line.

6. Document the inventory reconciliation process mentioning the methods used to count and compare inventory and steps taken to resolve any discrepancies. Also note down the adjustments made to accounting records.

Also read: Inventory Management & Inventory Visibility Challenges and How To Resolve Them

Conclusion

It is vital for businesses to periodically engage in inventory reconciliation. They must match inventory data with the physical count, even if they haven’t succeeded in finding the cause of the discrepancy. They should also create an inventory reconciliation statement that overrides previous figures and accurately represents the current stock.

Done right, inventory reconciliation can help a business avoid over or understocking. It can also highlight the root cause of discrepancies and help a business improve inventory tracking and management.

Learn about GEP’s Total Inventory Management Solution