How to Do a Physical Inventory Count (Step by Step)

How to Do a Physical Inventory Count (Step by Step)

A physical count is the only way to know what you actually own. Done well, it takes a few hours and produces numbers you can trust for a year. Done badly, it takes two days and produces numbers nobody believes.

Two weeks before

• Pick the date. Choose the slowest day of your slowest week, outside trading hours.
• Freeze the catalogue. No new SKUs, no renames, no merges in the week before the count.
• Clear the decks. Process every pending delivery, return, and write-off so the system is current.
• Tidy the space. Consolidate split stock, face up shelves, and label every bin and location. Most counting time is search time.
• Print count sheets or prepare scanners. One sheet per location, listing location and SKU, with a blank quantity column.

One week before

• Assign teams of two: one counts, one records. Pairs are measurably more accurate than individuals.
• Walk the route with your team so nobody is deciding where to go on the day.
• Decide the treatment of grey areas in advance and write it down: damaged stock, customer holds, goods in transit, consignment items, display units, samples.

The day before

• Complete all sales entry and receiving.
• Take a backup or export of current stock levels.
• Set aside and clearly mark anything that must not be counted (goods sold awaiting pickup, personal items, fixtures).

Count day

1. Brief the team — 10 minutes, cover the route, the rules, and the grey-area decisions.
2. Count blind. Sheets show SKU and location but no expected quantity.
3. Work location by location, never product by product. You count a place completely, then move on.
4. Scan wherever possible. A scan removes SKU misidentification, the largest single source of error.
5. Tag counted locations so nothing is counted twice or skipped.
6. Do not adjust anything yet. Counting and adjusting are separate jobs.

Reconciliation

Enter the counted quantities and produce a variance list — expected versus counted, in units and in value. Then:

• Sort by value, not by unit count. A 40-unit variance on a 30-cent item matters far less than a 2-unit variance on a $400 item.
• Recount every high-value variance before adjusting. Use a different person.
• Look for mirror errors — a +12 on one SKU and a -12 on a similar SKU is almost always a mix-up, not shrinkage.
• Check receiving history on any product with a large negative variance. Supplier shortages hide here.

Posting the adjustments

Adjust in one batch, on one date, with a reason code on each line: damaged, miscount, theft, supplier short, sample, write-off. The reason codes are what make next year's count faster, because they tell you where your process leaks.

Record the total value of adjustments. That number, divided by your cost of goods sold for the period, is your shrinkage rate. Most small retailers land between 1% and 3%. Above 3% deserves a serious process review.

After the count

• Reset reorder points using the corrected figures.
• Mark down or clear anything that has not moved in six months — you just paid to count it.
• Note every location that was disorganised and fix it before the next count.
• Book the next count in the calendar now, and consider switching to rolling cycle counts so you never need a full shutdown again.

The mistakes that ruin counts

1. Counting while selling
2. Showing expected quantities to counters
3. Leaving unlabelled bulk stock in the backroom
4. Counting with a spreadsheet on a phone with no scanner
5. Adjusting in dribs and drabs during the count instead of one clean batch
6. No reason codes, so the same problems recur next year

Making the next one easier

Software carries most of the load if you let it. ExpressBizTools keeps stock levels updated as you sell and receive, supports barcode scanning from a phone or USB scanner, and shows movement history per product — so your count starts from a much smaller variance in the first place.