Did you notice this week’s episode title is a little cryptic? That’s because today’s topic is not sexy and I didn’t want you to skip over it.
Let me also say that today’s episode is similar to the last few in that I am not an expert on everything I’m discussing and that you should definitely speak to your accountant to find out what is best for your particular business. BUT — I wanted to make sure this was on your radar as we go into the new year.
The main topic of today’s episode — physical inventory! I know it’s not sexy, but this blog post is short so keep reading.
So tell me… when was the last time you did a physical count of your inventory? Yep, I mean physically counted each and every one of your on-hand units? Depending on your business this could be super simple, or a total fucking nightmare.
Either way, it’s something you should be doing in your business at least once a year.
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The 4-5-4 Retail Calendar
Typically, retailers who work from the 4-5-4 Calendar for sales planning and accounting purposes will have a physical inventory at the end of January or early February to coincide with the end of their fiscal year.
The retail calendar was created in the 30s to give retailers more accurate sales reporting. The 4-5-4 calendar makes sure you have the same number of weekends for comparable months, matches up holidays, and let’s you compare same day sales. For example, Wednesday compared to Wednesday vs. just comparing dates.
The 4-5-4 calendar also puts January revenue, markdowns, etc. into the year that that is actually responsible for them. Think about it, once Christmas is over retailers have to markdown goods, while shoppers are out spending all the cash and gift cards they got as holiday gifts. Especially when it comes to taking a margin hit on those markdown goods, who wants to start off the year with a low margin?
Most small businesses work off a regular calendar year where your year starts on January 1st and ends on December 31st. And there isn’t anything wrong with this, it’s just a different way of tracking numbers.
No matter which accounting period you use, you still want to do a physical inventory. The difference is really about when you’ll take that inventory. If you’re on a regular calendar year, you’ll want to do this in early January. Not only does it coincide with the end of your year, but your stock is likely to be lower at this point, which means there are less units to count.
The importance of physical inventory
As a small business you might be thinking, why should I even bother taking a physical inventory?
It’s important to know how much inventory you actually have on hand. In a small eCommerce business you shouldn’t experience a ton of inventory shrinkage, but it’s still possible.
The 3 biggest causes of inventory shrinkage are administrative errors, internal theft and external theft. If you don’t have a brick + mortar element to your business and a relatively small, trustworthy team, theft isn’t likely a huge problem for you. But paperwork errors, misships, and damaged product due to poor warehouse storage could all cause shrinkage in your business.
There are also some tax requirements depending on the size of your business and some other factors. I’m not going to speak on those because I’m not a professional, but if you haven’t already, definitely talk to your accountant.
Don’t rely on your systems for on-hand inventory
If you’re just going off what your systems say in terms of your current on-hand inventory, you could be missing out on inventory loss deductions.
Relying on your system’s on-hand inventory can also lead to some other common situations such as needing to cancel orders because you oversold something or the only units you have left are damaged.
Maybe you forgot to recieve a shipment into your inventory management software and you actually have more of an item than you realized. Instead of spending that cash on something else, you’ve been spending cash to replenish that item.
Or worse, your website says you’re sold out of something but you’ve actually got a bunch of units sitting in your warehouse that you could be selling!
Treat your inventory as an asset
From an accounting perspective, inventory is technically an asset on your balance sheet and if that number is incorrect then so is your balance sheet.
Ultimately, if you’ve got a significant amount of inventory on-hand at any given time and you haven’t done a physical inventory in awhile or ever… this is probably the time to do it.
Counting inventory for an eCommerce business can be tricky
Unlike a brick + mortar store you can’t really close your store and prevent new purchases from coming through. I mean you can, but you probably don’t want to do that.
You just have to make sure that before you upload your new inventory counts, you’re removing any units that were sold since you started counting. If you counted 17 widgets, but sold 3 while you were performing the count, make sure you’re only updating your quantity to 14, otherwise you’re going to put those 3 sold units back into inventory.
If you’re using a third-party inventory management system like Stitch fix that puts sold items into a committed status, your process should be different. Reach out to the platform provider for specifics.
It might be best to plan your inventory count for an evening when sales are generally slower on your website so you don’t have to worry about accounting for too many additional sales that come through.
Your inventory is one of the most important assets in your business
So you want it to be as accurate as possible. To make your job even easier, consider implementing regular cycle counts throughout the year. Cycle counts are where you do physical counts of smaller batches of inventory on a regular basis — like weekly or monthly —on a rotating basis. For instance, you might group them based on location in your warehouse, or based on the velocity of sales. This allows you to consistently update your inventory numbers.
Depending on the volume of your business you might be able to get away with not doing a full physical inventory at the end of the year because you can be confident that the numbers in your system are accurate.
I know, inventory isn’t sexy, I get it. But starting the new year with fresh accurate numbers seriously does feel so good.
