When you are conducting perpetual inventories, you are constantly assessing your stock levels. By maintaining accurate stock levels, you are ensuring your customers will have access to the merchandise they are looking for. This creates consistent customer service and maximizes your store’s sales potential. Having an accurate on hand inventory also helps you to reduce your cost of goods by eliminating erroneous inventory orders, as well as identifies potential theft issues more readily.
To have an accurate on hand inventory, you need to have a system in place that captures your inventory movement at the SKU level. This system should recognize any time an item comes in or goes out of your store. This should include receipt of product from the vendor, sales, customer returns, returns to vendors, and miscellaneous usage like damages or store use. You should also have a way to manually make inventory adjustments through processes like cycle counts or inventory replenishment audits.
By maintaining these counts and processes, you should be able to look at any given product and know exactly how many of this item you have. This helps you prepare for sales and special promotions, or to satisfy a larger than normal quantity purchase by a customer. Cycle counts are an invaluable tool in ensuring these counts are up to date and accurate.
A cycle count is a manual count done by a store employee to determine if what the store’s computer system says you should have on hand matches with what you actually have on hand. For example, you are preparing an end cap to be filled with “Item A” for an upcoming sale this weekend. Your on hand inventory says you should have 20 of the item, so you go and look to find all 20 pieces. After searching the sales floor, you discover that you can only find 15 pieces. So you take those 15 to the end cap and enter a cycle count adjustment into the computer system to subtract the missing 5 pieces. Your computer now says that you only have 15 pieces, and you have a shortage of five pieces.
After the weekend is over, all of “Item A” was sold. Your inventory tracking system shows that you have -5 on hand. Negative 5? That indicates that you sold more than what you physically had on hand. Hmm. Something is very clearly off.
One very likely possibility is that when the employee was looking to fill the end cap, they did not look in the back stock room to see if there was any merchandise there. During the weekend, another employee found the missing 5 pieces and restocked the end cap for the sale. Because the employee had cycle counted and adjusted the items out of the inventory, a negative was created when the “missing” five pieces were sold.
This is one example of why it is important to maintain an accurate inventory, even when a manual adjustment is made. When the employee made the adjustment, there was the potential to accidentally order more product than what was needed. If the computer system thought that there was less than what you actually had, an order could have been generated to get the stock levels back to where your store should be. Because the product was physically still in the store, you could have been left with extra product that you didn’t need.
Having a negative on hand of an item means that a recount should be made quickly to determine what the error was and have it fixed. Adjusting your inventory back up to the actual stock levels will not create an overage.
This is not extra product that you didn’t have before. Think of it like loosing a five-dollar bill and not knowing where it went. Then the next winter, you pull out your coat, reach into the pocket and find a five-dollar bill. That money did not magically appear. It was your money that you misplaced and later found.
Fixing your negative on hands does not add extra to your inventory, or your bottom line. It fixes your inventory where a shortage was previously created in error.
