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How to Take Inventory: The Benefits of Physical Counts

As a small business owner, I know how important it is to know how to take inventory. That’s why I always make sure to do regular physical counts of all my products. Not only does this help me stay organized, but it also allows me to catch any errors or discrepancies that might have otherwise gone unnoticed.

If you’re not already incorporating physical inventory counts into your operations, I would highly recommend doing so. Let me share a few tips on how to take inventory the right way.

What is an inventory count?

An inventory count is an important way of tracking what products are available and in what quantities. This information helps businesses make decisions about ordering, stocking, and selling products.

An inventory count allows you to compare the physical stock in your possession against the records you have kept in your inventory tracking system. This helps ensure accuracy and can prevent issues such as overstocking or understocking.

Do the numbers match? If they are not the same, then you can ask why, and put in place plans and procedures to reduce the discrepancy.

Different companies choose different ways to count their inventory, each with its own advantages and disadvantages. Some carry out annual or quarterly reporting, while others prefer cyclic reporting. Cyclic reports allow for more accuracy in inventory management and can help prevent issues like running out of products.

Types of Inventory

Understanding the inventory is key to effective inventory management. These are just a few examples of the types of physical inventory.

  • Raw materials
  • Unfinished products — in progress and not ready to be sold
  • Finished products — stored in a warehouse until shipped
  • In-transit goods — no longer in the warehouse and are being transported to their final destination
  • Cycle inventory — shipped to a business from a supplier or manufacturer, then immediately sold to customers
  • Anticipation inventory — excess products in anticipation of a surge in sales
  • Decoupling inventory — parts, supplies, or products set aside in anticipation of a slowdown or halt in production
  • MRO goods — Maintenance, Repair, and Operating supplies
  • Buffer inventory — safety stock that serves as a cushion in case of an unexpected issue or need for more inventory 

Organizing your inventory can help manage your business effectively. For example, you may want to keep track of your finished products separately from your raw materials. This way, you can more easily see what needs to be replenished or sold.

Benefits of Physical Inventory Counts

Performing a physical inventory benefits your customers, as it provides them with the certainty that stock levels will be accurate. In the age of instant gratification, no consumer wants to wait around for a product they can’t find. This leads to improved customer satisfaction and loyalty.

Furthermore, having up-to-date inventory records is essential for businesses to make sound decisions regarding sales and purchases.

One of the benefits of conducting a physical inventory count is that it can help you to understand and plan for potential losses. Losses can occur due to theft or breakage, and by keeping track of your inventory levels, you can be better prepared to deal with these situations.

The longer an item remains in inventory, the less its value becomes. This makes the cost of stocking the item higher than the item’s value.

10 Essential Tips on How to Take Inventory Effectively

Here are the 10 best tips to help you manage your inventory effectively for greater profitability and cash flow management.

1. Prioritize Your Inventory

You can categorize inventory into A, B, and C groups. The A category includes the most important items and is perhaps more expensive, but they tend to move more slowly than B- or C-category products.

You’ll need fewer of the high-ticket items in the A group while. C items are your lower-cost items that will turn over quickly.

B items somewhat fall in the middle: they’re neither too expensive nor too cheap, and they tend to move slower than A items and faster than C items.

2. Track All Product Information

Keep detailed records of every product in inventory, including UPCs, supplier information, country of origin, and the lot number.

You can also track the costs of your items over time, so you are aware of any factors that may affect the price, such as seasonal changes and scarcity of the item.

3. Audit Your Inventory.

Some businesses have an annual physical inventory of their stock, while others do a monthly, weekly, or daily basis.

No matter how frequently you check, it’s important to actually take physical counts of your stock. This will help you ensure that what you’re counting is what you’re supposed to have.

4. Analyze Supplier Performance

If your inventory is regularly being affected by an inconsistent or late delivery from your suppliers, it may be time to take matters into your own hands.

If your suppliers are causing you problems, it is important to have a discussion with them to identify the issues and explore potential solutions. If the situation does not improve, be prepared to switch suppliers.

5. Practice the 80/20 Inventory Rule

Inventory management of your most profitable stock items is the key to 80% of your profits.

As a small business owner, it is important to monitor your sales cycle and inventory. By tracking your best-selling items and keeping them stocked, you will maximize your profits.

6. Be Consistent in How You Take In New Stock

It is important to have a standard process for taking in and processing new stock, to avoid discrepancies between your inventory and purchase orders. If everyone takes in stock differently, it can be difficult to track where exactly your inventory is and why your numbers don’t match up.

All personnel who receive inventory must follow the same process to ensure accuracy. All boxes should be verified, received and unpacked together, counted accurately, and checked for accuracy. This will help to avoid discrepancies at the end of the month or year.

7. Track Sales

It is important to keep track of how many items are sold each day, as well as update inventory totals daily. This allows for accurate record-keeping and helps to avoid any potential issues.

It is important to keep track of your inventory and understand your stock levels. This includes knowing when items are selling, as well as which days or times they are most in-demand.

8. Take Control of Ordering Restocks

Some suppliers will manage your stock for you, freeing up your staff and your time.

Remember that your suppliers have completely different goals than you do. They want to sell their products, while you’re more focused on selling the most profitable products.

Make sure to check the inventory of all your items and order restocks yourself.

9. Invest in Inventory Management Technology

If you’re a small business, you can manage these first 8 items with a spreadsheet and notebook.

As your business grows, you will inevitably spend more time on inventory management than you do on other aspects of your business. If you don’t stay on top of your inventory, it can quickly get out of control and start costing you money.

When it comes to inventory management, having the right software solution in place can make all the difference. Before deciding on which software to go with, be sure to take into account what your specific needs are and whether or not the chosen software will offer the necessary analytics for your business. Ease of use is another important factor to consider.

With POS software, inventory is easier to manage because of the quantity of data and the rate at which inventory turns over within most retail businesses.

When you manage your inventory with a spreadsheet or pencil and paper, it can become a burden at the end of busy days.

When you have so many moving parts in your inventory management, errors are bound to happen which can then throw off all of your data.

When you use a POS system, inventory management is an automated process. You don’t have to worry about updating your stock levels every time you sell a product.

You can use your POS system to easily query how much of a product you have on hand at any given time. Additionally, most POS systems come with detailed inventory reports that can help you better understand what is happening in your business.

10. Integrate the Right Technology

Managing inventory isn’t just about software. Mobile scanning and point-of-sale systems are two technologies that can help.

When purchasing new technology, make sure that it’s compatible with your existing systems.

If your point of sale (POS) software is unable to communicate with your inventory management (IM) solution, it could result in time wasted transferring data between systems. This could also lead to inaccuracies in your inventory count.

How to Improve Physical Inventory

Retail businesses must strike the right balance between having just enough stock to satisfy customer demand but not so many items that it’s wasted money.

Here are 5 steps to improve your inventory management.

1. Classify Your Inventory

There are many inventory classification systems, such as the ABC system we mentioned earlier, but there are other ways to classify inventory.

One method is to physically mark products with labels, stickers, or packaging. You can categorize your stock by grouping it by price, department, or other factors. This makes it easier to count and value your merchandise.

There is no one right way to categorize your inventory, but creating a consistent system for categorizing and valuing your stock is important.

2. Forecast Inventory for the Upcoming Year

After analyzing your historical sales data, it’s time to calculate how much inventory you’ll need for the upcoming year. Make sure to take into account things like customer buying habits, economic trends, and new item introductions.

3. Get Rid of Unwanted Inventory

It’s not wise to keep products in inventory that won’t be sold. Now is a good time to do markdowns and sales to get rid of these items.

If you have excess stock that you won’t or don’t intend to sell, there are a few things that you can do with it.

One way is to sell the items to liquidation companies. You won’t get much from doing this, but it will help clear some shelf space and leave you with some extra money that you can put into purchasing more products.

Another option is to donate the products. Not only will doing this help a great charity, but you may be able to get a tax write-off for them.

Finally, you can offer the products for promotional purposes.

What to Do After an Inventory Count

Now that your inventory has been completed, you need to follow up with the information you have gathered. Check for any glaring errors and investigate them. Also, update your spreadsheet with any new or changed data.


How to take inventory? Physical inventory counts are an essential part of any effective inventory management system. Not only do they help you stay organized, but they also allow you to catch errors and discrepancies that might otherwise go unnoticed. If you’re not already incorporating physical inventory counts into your operations, I would highly recommend doing so.