Knowing how to calculate a physical inventory value is essential for a retail business owner. This internal organization exercise may seem trivial, but it is needed to ensure the smooth running of your inventory management.
To calculate a physical inventory value, you must first determine how to do it, count your physical stock, figure out the value of the inventory, balance everything and, then, update the accounting inventory. Here is the list of steps ordered chronologically:
Briefly, taking an inventory consists of counting all the items and products available for sale in your business. Indeed, the inventory is all products, items or stored goods that have not been sold yet.
For your retail store, keeping your inventory counts accurate makes it easier to manage your business. This logistical aspect is essential to identify your assets and liabilities.
Companies take inventories in order to have an overview of the items they have and to find the differences between the physical inventory and the accounting inventory.
Taking physical inventory annually or monthly allows you to know the real value of your assets, prevent accounting errors and make you comply with the laws.
In sum, here are 4 reasons to take inventory for your store:
There are different types of inventory taking. Pick the one that suits you best.
This type of inventory is the most common for boutiques, retail stores, franchises, etc. However, be aware that carrying out a single inventory per year can limit the data you collected and errors take longer to find.
Taking inventory on a periodic basis (monthly, quarterly) is a business decision. Generally, this type of inventory taking is planned during the least active periods of the year for the company in question in order to avoid any interference with the smooth running of activities.
For this type of inventory taking, the inventory count is done within a point of sale software or warehouse management software on a daily basis. Stock data is updated in real time, which limits loss of time and efficiency.
Here’s how to calculate physical inventory:
Before you start your inventory taking process, you need to have the right tools available to your employees. Select the manpower needed to complete the task and choose the best method to do your inventory beforehand.
Also plan how long inventory taking will take to give a clear guideline to your workforce. For example, decide if you want to do it in two days or one week. This will help you manage your employees’ expectations and avoid unnecessary frustration.
Are you wondering when is the best time to take your inventory? Consider the effect of seasonality and downtime for your business and try to organize your inventory taking during periods of less activity.
Most stores do their inventory once a year, i.e., at the end of their taxation year. However, some store owners do it more regularly if they feel the need to.
When counting physical inventory, it is important to count EVERYTHING and leave nothing behind. Be exhaustive in your counting method so as not to distort the data collected to establish the physical inventory.
Pro tip: make sure all of your suppliers are aware of when your inventory will be taken, as it is not recommended to receive merchandise during an inventory taking period.
The primary purpose of valuing your physical inventory is to know how much it is worth. When you know the real monetary value of your physical inventory, it is much easier to manage your stores.
Knowing the value of your inventory or warehouse at all times is a valuable asset.
The calculation you need to use to know your physical inventory value whether you calculate it with the help of a software or by hand, is the following:
Initial value of inventory + Value of additions – Value of withdrawals
÷
Initial quantity of inventory + Quantity of additions – Quantity of withdrawals
To avoid the inconveniences of human error or carelessness, it is better to use technological tools such as a point of sale software or an accounting software to assist you in this task.
A point of sale software is used for inventory management, sales, transaction management and daily, monthly or annual monitoring of statistics while an accounting software helps you manage everything related to your accounting.
To learn more about a powerful point of sale software, contact us.
Once the following steps are completed, it is time to update the data in your management systems. It is only once you know the value of your physical inventory that you can update your accounting inventory.
By doing so, your accounting inventory will be flawless and error free!
Thanks to these steps, you will have a physical inventory that will match the accounting inventory, which will considerably harmonize your inventory management.
In conclusion, knowing how to calculate your physical inventory value is crucial to successfully maintaining an error-free inventory. Neglecting this step can have significant financial consequences, including lost revenue and additional operating costs. By organizing a game plan, counting inventory, valuing inventory and updating everything, you will be assured that your inventory, both physical and accounting, will be accurate and up to date.