Regardless of your business’s industry, taking a year-end inventory count allows your business to close the books on the past twelve months while getting organized for the new year ahead. In this article, we’ll dive into the importance of a year-end inventory count and explain how to count your end-of-year inventory.
We’ll also help you understand the difference between a year-end inventory and an “inventory cycle count” and “ending inventory,” what to do if you discover discrepancies between your records and counted physical inventory, and how findings from your year-end inventory count can help you forecast demand for next year.
What is a year-end inventory count?
A year-end inventory count reveals exactly how much physical inventory your business has on hand at the end of the year. The count must include all types of inventory and assets, from raw materials to finished goods to equipment and machinery. To ensure an accurate annual snapshot of all available inventory, a business usually needs to pause operations or count inventory during non-business hours.
By capturing this end-of-year count of your company’s inventory, you’ll be able to:
- Properly comply with financial requirements, including preparing tax returns with accurate depreciation data, annual reports, corporate audits, and more.
- Better forecast demand for inventory for the following year
- Identify vulnerabilities discovered during the count, such as shrinkage and obsolescence, and update inventory management strategies (and SOPs) accordingly
- Physically organize inventory for next year—and get a head start on any new inventory management strategies during the tidying process.
While most businesses perform this physical inventory count at the end of the calendar year, mid-year (July 1) is also an option—as long as this works for your accountant and your business tax returns.
This easy, comprehensive guide will help you:
Free Ebook: Getting Started With Inventory Tracking
What’s the difference between a year-end inventory and an inventory cycle count?
A year-end inventory count is performed annually to verify that all inventory on hand matches the numbers on your inventory list or in your inventory spreadsheet or software. On the other hand, an inventory cycle count audits a small portion of inventory, a little bit at a time.
Over time, inventory cycle counts will audit every item you have on hand, but achieving this could take an entire year. As a result, an inventory cycle count will never give you a comprehensive list of everything you have in stock at a specific time—which is the chief goal of an end-of-year count.
Note that a year-end inventory count usually requires your business to cease operations and focus only on physical counting. In contrast, an inventory cycle count can easily occur during regular business hours.
What’s the difference between a year-end inventory and ending inventory?
A year-end inventory count is the official physical count of inventory on hand. It is not the same as ending inventory, an official inventory accounting calculation of the total inventory value available “for use or sale” when an accounting period ends.
You can convert your end-of-year inventory count into an ending inventory calculation, but they are not interchangeable terms.
Related: How to Analyze Inventory on a Balance Sheet, including Calculating Ending Inventory
How to perform a year-end inventory count
There is no one-size-fits-all solution for performing a year-end inventory count. Every business is different, and you’ll need to tailor your approach as such. That said, the following steps are a great starting point.
- Determine a classification system for inventory, if required.
- Count items on hand using a clipboard or a printout of your inventory list as a baseline.
- Identify any discrepancies, then update digital data accordingly.
While year-end inventory counts—and preparing them—can be time-consuming, the right inventory management software can streamline all three steps of the above process significantly.
For example, if you use an inventory app or software, you’ve likely already categorized your inventory into meaningful groups and folders that’ll make locating and bucketing inventory that much easier. What’s more, generating a list of these categorized items will also be a breeze, and you can pick and choose what data (including location, pictures, value, barcodes, and QR codes) to include in that customizable inventory report.
Download the report as a spreadsheet, customize it as needed for your audit, and then get counting. When you’re done and have analyzed the data for discrepancies, you can update your inventory data as needed using barcodes and QR codes to slash the risk of human error.
What if your business discovers inventory shrinkage?
Businesses often uncover inventory shrinkage during end-of-year inventory counts. After all, only a physical inventory count can reveal whether what you have on hand matches what you have on paper—or spreadsheet or inventory app.
Inventory shrinkage occurs when there’s less physical inventory than what’s listed on inventory records. This can happen due to human error, vendor shortages, damaged stock, lost inventory, or inventory that’s been stolen.
If your business uncovers inventory shrinkage during an inventory count, your team will want to look for more information. If you’re using inventory management software or performing inventory cycle counts, you may be able to sift through past inventory records to determine when shrinkage occurred.
Widespread, significant shrinkage might indicate fraud or theft. One-off mistakes tend to reveal clerical errors. Damaged goods are self-explanatory but must be addressed with vendors and suppliers.
Once you’ve investigated inventory shrinkage, your business should put guardrails into place to prevent further profit loss. Standard preventative measures include:
- Tightening security where your inventory is stored—perhaps install cameras or lock up high-value items.
- Training employees to properly account for inventory during cycle counts or perpetually with the help of barcodes, QR codes, and an inventory app.
- Only allowing particular, trained employees to accept and inspect the new inventory.
- Consistently verifying invoices, purchase orders, and delivery slips when new inventory arrives.
- Reviewing daily transactions right on your inventory app every day.
- Checking your inventory shrinkage often via cycle counts to ensure the problem is getting better, not worse.
Related: What is Perpetual Inventory Management?
What if you have more inventory than you expected?
Once you complete your year-end inventory count, you may realize you have more physical inventory than expected. The first step is determining why your physical and digital numbers don’t match—and how to avoid this problem next year.
From there, you need to determine what to do with excess inventory.
First, consider what excess inventory you plan to utilize next year. Then, adjust your plans, budget, and orders for next year accordingly.
Next, address the inventory you don’t need in the near future. What items could be held onto since they won’t expire? Is it possible your vendors and supplies might consider a buy-back?
There may also be items in your inventory that could be donated. If you donate excess inventory, talk to your accountant about writing off those donations.
Finally, if inventory is genuinely excessive, you might want to chat with a liquidator about buying your excess inventory. It won’t be profitable, but you can cut your losses, clear up space, and move forward.
Using your year-end inventory count to predict next year’s demand
One of the best reasons to conduct annual inventory counts is to better understand how your business used (or didn’t use) certain items over the past twelve months. A detailed snapshot of your available inventory can help your business forecast demand for the year ahead.
Plus, by reviewing what hasn’t sold, you can make a plan to stir up demand with promotions, sales, and marketing campaigns. These strategies can help you move old available inventory so you can focus on restocking only what you know your customers will want next.
About Sortly
Sortly is an inventory management solution that helps you track, manage, and organize your inventory from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small companies. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your projects succeed.
With Sortly, you can track inventory, supplies, parts, tools, assets, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on your business. That’s why over 15,000 businesses globally trust us as their inventory management solution.
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