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Making Year End Inventory Procedures Count
by Jeff Brandenburg

In addition to the Holiday season, December is often the time of year where many businesses begin to prepare for their year end. Many hours are spent preparing for the payroll reports, financial statements and customer request for tax data that coincide with year end. One area that often is put on the “back burner” is the year end inventory counts. Since a proper inventory count and valuation is the key to accurate financial information, why do we often spend so little time preparing for the year end inventory?

So no matter if your year end is December or June, or if you take inventory counts throughout the year, accurate count procedures are a must. Let’s take a look at some of the keys to conducting a successful inventory count in order to make this critical element of your financial statements more meaningful and less disruptive for your staff and organization.

Begin With the End in Mind

What do you expect from each of the departments? Should the counts be done by hand or on the computer? When are the final counts and valuations due? What does your staff do to get the counts from the departments into the system? Do your counts take a lot of employee time? Are the counts only correct some of the time?

We can't provide accurate financial information without a proper inventory count, so why do we spend so little time preparing for the year end inventory? Don't let it be a "back burner" issue.

The answers to all of these questions are key to developing an overall plan for taking the year end inventory. Spending time looking at the entire inventory process, from the actual counting to when it finally appears in the financial statement, is a critical element to the overall success of the process. Start by gathering input from the employees that count the merchandise, value the goods and then actually enter the data into the system to determine what works well and what causes problems. With this input in mind, develop the timing and procedures that will result in the best and most accurate count.

Prepare Written Instructions

Whether small or large, very few organizations actually prepare written instructions for the employees counting the inventory. Why? The answer I hear most often is “Because they have been doing it for years and know what to do”. Just because someone has done something for years it does not necessarily mean they know what to do! What happens if that person leaves? What if every year the office staff spends time correcting the information the employees provide?

Written instruction will provide for continuity between the counts at all locations and will help to make sure all employees are on the same page when performing the year end counts. The instructions should address the items identified as “issues” in the planning process and may include such things as how to handle obsolete goods, what order the goods should be counted, when the results are due to the office and how to handle goods stored at other locations. How do you prepare the written instructions? Pretend you are telling someone who has never counted inventory how to do the year end count. Include everything that is needed to provide for a smooth and accurate count.

Prepare a Layout of the Area to be Counted

While this might not be necessary for all locations, it often provides an easy “check” to see if everything was actually counted. If you handle agronomy or grain products, it is critical to draw a picture of each of the bins and the contents. Then work through the calculations and compare to perpetual records to make sure the records are accurate. Often departments will assume that the perpetual records are accurate and then be surprised when there are unexpected margin fluctuations. Perpetual records are a great tool; however actual physical measurements need to occur on a routine basis to make sure the perpetuals are accurate.

Perform Your Own Test Counts

Often businesses rely totally on their outside auditor to perform test counts. While this is a required auditing procedure, the auditors may not test all locations or spot check all of the goods. They consider a variety of factors in determining what to look at, but they will probably not go to all locations or count every bin. Therefore it is key that each department or location develop its own system for checking the counts.

Manager's Toolbox

Make an accurate inventory a high priority—No company knows its true financial position unless it knows the value of all its property.

Plan carefully—Consider the entire inventory process. Time spent eliminating weaknesses now will be invaluable later.

Put it in writing—Written procedures will save time and ensure accuracy.

Picture the task—Use graphic layouts if necessary to ensure every item is counted.

Test time—Errors can multiply as calculations are based on them. Double-check the counts.

Computers make it easier…really—Ensure that computer printouts are organized in a way that makes it easy to determine what has been counted.

Many organizations will have two employees count fertilizer and grain in order to provide a check on the measurements and calculations. Others will have an employee, other than the one who originally counted the goods, go around and count a variety of the items to make sure a complete count was made. However you choose to do it, it will be well worth your time and effort to look at the high dollar items, items difficult to count, or items where measurements and calculations are needed in order to insure an accurate count has occurred at all locations.

Using Computer Printouts

Often the computer system will be able to generate the perpetual counts or a listing of the items in the location. While this avoids hand-written sheets, it can create its own problems. For example, if the sheet lists all items in alphabetical order, how do you know if everything is counted? Since this may lead to items being counted in a non-sequential order (from how they appear on the floor) it is important to make sure the counters understand the inventory needs to be either counted in sequential order (regardless of what order it is on the count sheet) or that tagging procedures be used to identify items that have been counted.

If you are replying on perpetual records for the year end count, consider expanding your internal test counting of the merchandise to make sure all good are counted and that the perpetuals are accurate. Businesses that use perpetual records are usually testing them throughout the year for accuracy and then also physically count many of the items again at year end.

Inventory Valuation Procedures

We often hear how long it takes to price the year end inventory. Whether it is done by the department heads or in the office, this seems to take a lot of time and effort. It often causes long delays and does not allow the departments or management much time to look at the margins prior to the audit/review or compilation.

So what should you do? Again, look at the process and determine where delays occur. The inventory valuation procedures should be part of the overall written instructions provided to the employees. With continued computerization and the use of inventory codes the valuation process can be made easier. However, spending time to look into where the “snags” occur in the process and working to correct them will make for a more accurate and timely valuation.

We have only touched the surface of what it takes to conduct an accurate year end inventory count. An entire article could be written on each of the sections above, if you consider each of the section in the development of your plan the year end counts should be more accurate, timely and less disruptive to your organization.

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