What is an Inventory Count? Part 1 – Inventory Count Instructions

Inventory is one of the essential parts of a company’s balance sheet if you are selling goods. Companies create and sell their product to their customers using them. Therefore, business owners should count their products to see how much inventory they have at least once a year. Is there an exact way to go forth with inventory counts? Not necessarily. However, there are best practices companies can use to ensure that they accurately represent their total inventory by the end of their count.

The most common items needed for an inventory count consists of the following:

1. Count Instructions
2. Tag Controls (or electronic equivalent)
3. Count Sheets (or electronic equivalent)

In today’s post, we’ll go over the most common components of the count instructions and why they are needed. Let’s dive right in.

Count Instructions

Before the inventory count begins, management and the ones who will be executing the inventory count must align with the purpose and how to perform the inventory count. Instructions typically include the following:

1. When the inventory count will take place
2. Which inventory locations are in scope (i.e., which inventory sites and specific areas of a warehouse if the count is a cycle count)
3. Who will be responsible for counting inventory, reviewing the variances, and signing off as the second reviewer
4. How to record inventory on the count sheet
5. Whether the count is blind or not

These instructions are the most crucial part of the inventory count, in my opinion. Suppose the executors are not performing the inventory count correctly. Then, the integrity of the count is compromised. There’s a higher chance that the workers didn’t count the inventory accurately, collusion has taken place to conceal inventory theft, or someone inappropriately recorded merchandise (i.e., counted supplies or items that the company has no intention to sell to customers). Therefore, management should invest more time to ensure everybody is on the same page before starting with the inventory count.

When the Inventory Count Will Take Place

This part sounds like any common sense communication topic. However, it is not unheard of for the counters to have the inventory count date, but the sales team and logistics do not. I have attended complete inventory counts where forklifts are moving inventory around to fulfill a shipment because sales teams, not knowing there was a count in progress, wanted cargo to go out. So, each relevant department must be notified when the inventory count will take place. If there is any movement in goods, then, as we mentioned before, there’s a risk that the inventory count will need to be re-performed or the final results are inaccurate.

In-scope Inventory Locations

If you have ever done an inventory count, you appreciate how much time this process takes and how disruptive it is for businesses. Therefore, most companies do not perform an inventory count for their entire business in one day. If they perform a cycle count, the instructions need to be clear about which sections to count. The company may inadvertently transfer in-scope inventory and confuse the counters and the auditors if there is no proper communication. If there is a full inventory count, most companies stagger the count date for each location to fulfill customers’ needs while the others pause their operations in the allotted time. 

Assigning Responsibilities

It is essential to specify who will count, supervise, and review the final variances towards the end of the count. Generally speaking, you don’t want a reviewer also to count as this can cause a self-review conflict. The counter should also know about the product they are counting to understand how to measure the item, such as whether they are in units of thousands, one single unit, gallons, tonnes, etc. Also, the counter shouldn’t count the items they are directly responsible for, as this can cause a self-interest conflict. The supervisor should also not be involved in the area that they use daily for the same reason. 

How to Record Inventory on the Count Sheet

This section is mainly for companies that still use paper count sheets. Most electronic count systems now have audit trails that show modifications in the count. It is generally a best practice for alterations to a manual count sheet to be recorded with a strikethrough of the old value and the new value right next to the strikethrough. I have also seen counters put their initials next to the new value to show that they are the ones who modified the entry. In summary, showing how each item is recorded and proof of modification are the main goals of recording on a count sheet.

Blind Count versus Non-Blind Count

All the inventory accounts that I have been a part of consisted of a blind inventory account. Blind count means that the counter has no quantity disclosed to them before and during the count. This is important because if the counter knows how many items to look for, they can figure out a way to match that number and show that there is no inventory missing or a surplus. The employee can pocket the difference or can use it as a cover-up for someone else’s theft. As with any business, robbery does happen to a company, so there must be no tip to encourage cover-ups. 

Final Thoughts

I briefly covered the most common parts of the inventory instructions and why they are essential. Companies may discuss other components in the instructions. However, these should be standard in public companies and within privates that have established processes. In the following sections, we will discuss other inventory count areas, such as the purpose of the tag controls and count sheets. Hopefully, by understanding the core components of an inventory count, the inventory count can go smoothly and align the auditor and counter. 

The opinions expressed herein are my own and do not represent my employer’s views in any way. Nothing posted here should be considered official or sanctioned by my employer or any other organization I’m affiliated with.