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What Is Inventory Reconciliation and Why You Need to Do It

If you’ve ever run a business with inventory, then you know how important it is to keep track of your stock. Not only do you need to know what you have on hand, but also what’s been sold and what needs to be reordered. This process is called inventory reconciliation, and it’s vital for keeping your business running smoothly. This article explains in detail what is inventory reconciliation and the importance of doing it for your business.

What Is Inventory Reconciliation?

What is inventory reconciliation? It’s the process of reconciling your inventory records with actual counts of your merchandise. It helps companies reduce any inconsistencies in their inventories. By comparing these stock records, you can identify the root cause of any differences in your stocks.

Accurate and timely inventory management is crucial to keeping all products in stock.

It is important to reconcile inventory often to ensure accuracy and avoid discrepancies.

Even if your records are accurate, there’s often a difference between the amount of product you have in your warehouse and the amount that’s actually on your shelf.

Inventory reconciliation is the process of comparing the inventory records of a company with the actual physical count of inventory. This helps businesses to identify and correct any discrepancies between the two.

Making sure that your inventory is up-to-date and available is important. You can do this by reconciling your stock and ordering more as needed.

Inventory Reconciliation is the process of ensuring that your inventory records are accurate. In our guide, we’ll show you how to do an inventory recon for your online store. By following the steps, you can ensure that you’re keeping accurate stock records. Let’s get going!

Why inventory reconciliation is important?

Merchants face a problem if inventory records don’t match inventory on hand.

​​​​​​​Inventory reconciliation helps you find the discrepancies between what is recorded in your inventory and what is physically present in your warehouse. Once these differences are identified, adjustments are made to ensure the inventory records match the actual physical inventory.

Even with the best inventory management software, shrinkage (either excess or inadequate inventory compared to recorded inventory levels that cannot been accounted for) can happen. According to the National Retail Federation, the average shrink rate as a percentage for U.S. merchants is 1.38%.

Merchants can monitor shrinkage better by regularly reconciling inventory and cycle counting. It could be due to human error, such as inaccurate inventory counts or misplaced items in the stockroom. However, it could also be caused more serious issues like employee theft or supplier fraud.

If you notice a rise in shrinkage rates from one inventory reconciliation to another, it could be a sign that you need to do some investigation and develop loss prevention strategies to keep that number as low possible.

How to Reconcile Inventory – A 5-Step Process

Reconciling your inventory is more complicated than just adjusting the numbers in your books.

There are many factors that contribute to the difference between the numbers and it is important to identify why this is the case.

There are five steps to reconciling your inventory, whether you do so in a paper form or digitally.

Step 1: Check your physical inventory count

The only thing we can know for sure is how many actual stock items you have.

Before checking your financial records, it’s important to physically check and record your stock. You can do this by recording your stocks for a day or two. This can help you ensure that your books are accurate and up to date.

This is important to check because it’s possible that someone miscounted or misrecorded the inventory to begin with. Additionally, the physical inventory count could be lower than the numbers in your books if you are splitting inventory across multiple locations. Checking your physical inventory count is important to make sure that your records are accurate and up-to-date.

Doing inventory counting with your staff is a great way to get accurate and up-to-date data.

Step 2: Compare physical count with inventory records

During this process, you may discover discrepancies between your physical inventory count and your inventory management records. These stock discrepancies could be due to a variety of issues, such as missing paperwork, human error, miscalculations or math errors, unlisted items, scrap items (excess unusable material that gets sold off), supplier fraud, items owned by a customer or supplier, or backflushing.

After you have identified the root of the discrepancy, make a note of what caused it and adjust your process and records.

Step 3: Look at inventory deliveries/shipments since the last reconciliation

If you’ve conducted a stock reconciliation previously, you’ll want to look back to see if there were any discrepancies found between the two reconciliations that could explain the difference in numbers during this reconciliation.

If you’re still struggling to reconcile your numbers, look at your delivery records and your sales records for the past few months. Sometimes, the issue can be traced down to simple arithmetic errors or mistakes in recording your stocks. By going over your books, you can pinpoint the source of your discrepancies and fix the problem.

Other documents, such as shipping or delivery confirmations, can confirm what has actually happened. If there are no other documents that explain the difference, it’s possible that there has been some kind of fraudulent activity.

Step 4: Double down on discrepancies

Hopefully, you will be able to find a clear cause for the discrepancy. Once you do, you can create a “stock reconciliation statement” that explains the discrepancies (if possible) and overrides your previous records.

You can do this in Microsoft Excel or with your inventory management software.

If you’re unable to identify the root cause of the discrepancy, it may be beneficial to have a discussion with your team. By doing so, you can work together to try and find a resolution.

Step 5: Inventory Reconciliation

If you want your inventory reconciliation to be effective, you need to check your inventory on a regular basis. This way, you can get more accurate numbers over time and shrinkage of inventory will be minimized. In turn, this will help your business save money in the long run.

It’s important to reconcile your inventory at regular intervals so that your numbers are accurate and you can minimize inventory shrinkage. Schedule these reconciliations based on what works best for your business, taking into account any delays, halts in sales, or employee wages.


So, what is inventory reconciliation? Inventory reconciliation is the process of comparing physical inventory counts with inventory records. This can be done manually or through software that tracks sales and purchases in real-time. Doing this regularly will ensure your inventory reports are accurate, up-to-date safety stock levels, and give you peace of mind.