It’s that time of year again. That’s right: year-end inventory! If you own a retail store, it must be done. The IRS demands it to determine your tax liability. It also impacts your financial statements and overall business value, which affects the terms on which you can access outside capital for your small business.
That’s why year-end inventory doesn’t need to just get done, it needs to get done accurately. Errors have direct financial consequences. Errors that understate your tax liability could have graver consequences.
Taking time to do the prep work before you begin any counting helps ensure your inventory goes smoothly and accurately. Here are steps you can take to get your retail store ready for your year-end inventory:
- Clean up. You can’t count if the place is a mess. Clean up all storage areas, the back office, wherever inventory could be lying around. Some of the biggest causes of inventory miscounts is simply not knowing where all your inventory is. I’m not just talking about a big box that’s being stored somewhere inventory usually isn’t. I’m talking about finding all the pieces you’ve pulled from inventory to use as demos or samples, which may be sitting in unusual places around your retail shop. Speaking of which…
- Reclaim all the inventory you’ve taken offsite. Obviously you need to count inventory stored off-site. You already know that. But don’t overlook the pieces you’ve pulled from inventory for personal use or gifts.
- Organize your inventory. Clearly box, label, and physically separate inventory that’s not on the floor into different categories. Some of your onsite inventory must be counted, but some of it shouldn’t be. Your team needs to know what’s what. For example, any orders that have been paid, but not yet sent out aren’t inventory. Nor are any goods you’re returning to vendors because they’re damaged. Also make sure that your reserve stock, which is intended to hit the floor at some point, is clearly labeled. Each box or drawer should also have a general label of what’s inside, i.e., “women’s hats” or “organic candles.”
- Don’t overlook raw materials if you create your own products. If you’re making your own organic candles or any item you sell, the raw materials you buy to make them are part of your inventory. So are any products in process, but not yet finished. Separate these materials out as part of your clean up and organizational effort.
- Create an inventory map. Your inventory map shows where all the stock buckets are, so your team knows where to go and what to stay away from. The map should cover both storage and on the floor.
- Find documentation that explains and verifies the absence of unsold inventory. Did you donate some inventory? Were some deliveries short from what your order documentation says? Collect documentation of orders you over- or under-filled to your customers. Find the documentation for inventory you sent back. Without this information on-hand, you might have a problem resolving discrepancies.
- Prepare your reporting and counting sheets. Your team will use the counting sheets to record actual counts. All the counting sheet data gets rolled up into your reporting sheet. Separate your counting sheets in the way that makes the most sense for your business. You might separate them by location, depending on the size of your store. Or you may separate them by SKU number, with specific teams responsible for specific items. Either way, prepare and print out only the number of counting sheets needed for however you’re organizing your counts. Pre-number and label each counting sheet with what’s to be recorded. This way, you’ll know what’s been overlooked if a sheet is missing. Also include space at the top of the counting sheets for the counters to date their count and sign their names to it. The columns on the counting sheet should, at a minimum, list the SKU number or location (depending on how you’re organized your counting sheets), product description, and the actual count.
Your reporting sheet should be organized by SKU, which will also include the cost per item. When you add in the counts for that SKU, your report should calculate the value.
- Determine your methodology. Most small businesses will use the cost method to set a value on inventory. This is simply the cost you paid to acquire the inventory. Ideally, you can track actual cost, even for high volume articles. If this isn’t possible and the cost for items has changed, talk to your accountant about whether you want to apply your order invoices on a FIFO (first in- first out) or LIFO (last in- first out) basis.
- Determine how many counters you need. Counters should work in 2-person teams. Based on your inventory volume and the time you have to complete the inventory, figure out how many people you need counting. You may need to hire extra help. No matter how small your shop is, you’ll need at least two teams of counters, plus one point person. So that’s a minimum team of five people. You can be the point person. You want 2-person teams as a first and second line of double-checks on counts. After a count sheet is done, the team hands it in to the point person, who can address any discrepancies that might come up.
- Develop training documents. Regardless whether you’re using your employees or outside help to do the counts, the inventory team will need to be trained. Have a training session where you share your inventory map, clarify what will and will not be counted, how to use the counting sheets. Putting together training documentation will also require you clarify how you want teams to work. For example, will each 2-person counting team count separately and compare counts? Will they count once together, but you’ll have two different 2-person teams count the same inventory and then you’ll compare those numbers?
- Schedule the inventory. This can be a challenge. No one wants to close down to do inventory, but it may be the cleanest approach. Weigh closing down and the efficiencies it brings against the time it could take to research discrepancies and re-count inventory because sales have been occurring during the count. You might be able to take inventory of all space except the floor during hours of operation. If you do this, put a freeze on bringing out any more inventory on the floor during the count. You can then do floor inventory after-hours.
Inventory is a pain. No question. But your store merchandise is a key business asset; you must accurately determine its value. Year-end inventory is the only way to do that. You can’t prepare an acceptable profit and loss statement without it. Good preparation can help take the sting out and make taking inventory a smooth operation. If you’re thinking about getting financing to grow your business, taking a look at Inventory Financing and Accounts Receivable Factoring options might be your best bet. Contact United Capital Source today to see what programs you qualify for!