Accounting isn’t the most exciting part of running a business — but it’s one of the most important. And under the accounting umbrella is the crucial practice of inventory reconciliation, especially for any warehouse or manufacturing business.
In this article, we’ll walk you through each step of inventory reconciliation, explain how it benefits your operation, and provide tips for performing inventory reconciliation efficiently. Keep reading to learn how to minimize inventory discrepancies, or jump to the bottom to learn how Fishbowl simplifies inventory reconciliation.
Understanding inventory reconciliation
So, what is inventory reconciliation? Also known as stock reconciliation, it’s the process of matching your physical inventory count to the records in your inventory system, like Fishbowl or another inventory management software. It’s essential for maintaining accuracy in your stock levels, which in turn helps you track sales, production, and procurement.
This process is also key for managing inventory discrepancies — mismatches between your records and what you actually have on hand. Discrepancies happen for a variety of reasons. For example, shrinkage may take place because items are misplaced during shipping, counted incorrectly, or misentered into your system. Even accidental damage or theft can cause issues.
If these discrepancies occur, you want to sort them out quickly. That’s because the earlier you detect them, the easier it is to make adjustments and keep business running smoothly. By staying on top of inventory reconciliation, you guarantee your numbers match up and avoid costly mistakes or misinformation, like selling products you don’t have in stock.
Inventory reconciliation vs. order reconciliation
While inventory reconciliation and order reconciliation both deal with discrepancies, they serve different purposes. Inventory reconciliation involves regularly counting physical stock and comparing it to your system’s records to ensure accuracy. In Fishbowl, this is called “cycle counting.”
Order reconciliation is about matching purchase orders to incoming invoices when there are discrepancies between them to ensure your financial and new inventory records are accurate. For example, if a vendor charges you more than you expected, you may need to adjust the purchase order to reflect the actual amount on the invoice.
Choosing the right approach: 3 methods for conducting inventory reconciliation
There are a few different ways to approach inventory reconciliation, depending on your business’s needs and the level of detail required. Here are three of the most common:
- Seasonal method: The seasonal method involves reconciling inventory during specific periods, often based on peak times like the end of a quarter or during holiday seasons. This method works well for businesses with fluctuating inventory levels or industries that experience seasonal sales spikes.
- ABC method: The ABC method prioritizes inventory based on the value and frequency of items. “A” items are the highest value or most frequently sold products, while “C” items are the least valuable or least frequently sold. “B” items have moderate value and sales frequency. With this approach, you spend more time reconciling your high-priority stock and less on the lower-priority items. Focusing on the items with the most significant impact on your bottom line helps you maximize your time and resources.
- Arbitrary method: When you do inventory reconciliation arbitrarily, you select random inventory items for reconciliation without prioritizing based on value or season. Use this method when you just need to do a quick inventory check, but try to complete them routinely so you’re staying informed of what’s in stock. This method also doesn’t offer the same level of focus as the other methods, so it may be less strategic. But it’s still useful for keeping track of discrepancies on a spontaneous basis.
How to reconcile inventory in 5 simple steps
Reconciling inventory doesn’t have to be complicated. Here’s how to reconcile inventory like a pro:
1. Physical count
Start by conducting a physical inventory count. This means manually counting each time in your warehouse or storage area. It’s important to count everything, including raw materials, finished goods, and any other stock you carry.
You may want to use a barcode scanner or counting sheets to help track the quantities for accuracy.
2. Compare count and records
Once you have your physical count, compare it with the inventory records in your system. This step is crucial to identifying discrepancies between recorded stock levels and the stock you’re actually holding. It’s not uncommon for records to be off due to human error or miscounts, so take your time to ensure accuracy when making comparisons.
3. Account for missing items
If the physical count doesn’t match your records, identify the exact issues you’re facing. Check whether missing items were misplaced, overlooked, or potentially damaged. Double-check that you’re not missing any recent shipments or deliveries. It’s also possible that your employees forgot to update the system to account for these or didn’t log new entries correctly.
4. Evaluate and document discrepancies
After accounting for discrepancies, evaluate and document them carefully in an inventory reconciliation report. Review past shipments or sales transactions to pinpoint where things might have gone wrong. Identify the root cause — a shipping error, miscount, damage, or theft — and note the details in your system.
Documenting discrepancies helps prevent future issues by indicating what processes need more attention. If the errors constantly arise during the receiving period, you might need a better unpacking process. It also ensures that all employees are on the same page about the causes and correction of the issue, helping avoid future errors.
5. Update your records and repeat
Finally, update your inventory records to reflect the physical count. Adjust mismatched numbers so that your system shows the correct stock levels. Once you’ve done that, the inventory reconciliation process is complete.
Perform regular inventory reconciliations to maintain accurate recordkeeping and avoid surprises down the road. The more often you do, the easier it is to manage and prevent discrepancies.
4 benefits of consistent inventory reconciliation
Ensuring that what’s on paper matches what’s on the warehouse floor streamlines operations and inventory management. Here are the top four ways this can benefit your business.
1. Precise inventory reports
Regularly reconciling inventory ensures your records are accurate and up to date. This allows you to create more precise inventory reports. In turn, you make better-informed decisions about reordering (preventing issues like overstocking and stockouts), inventory management, and sales strategies. As a result, you keep customers satisfied without unnecessarily tying up capital in excess stock.
2. Reduced risk of loss or theft
Your inventory is valuable and worth safeguarding to minimize financial losses. Frequent reconciliation helps spot discrepancies early, reducing the chance that loss or theft will go unnoticed. Staying on top of your stock levels lets you quickly address issues before they become more pressing problems.
3. Better inventory forecasting
The precise inventory records you get from regular reconciliation allow for more reliable forecasting. For example, if you know you already have excess seasonal inventory in stock, you won’t have to ramp up production to meet consumers’ needs next summer. Planning for necessary adjustments to keep up with market demands also becomes more manageable with this information.
4. Streamlined operations
Consistent reconciliation helps you identify and correct inefficiencies in the inventory management process. If you realize you have a theft problem or that items are constantly damaged during shipment, you can take steps to address these issues — such as improving security measures or working with suppliers to improve packing techniques. Staying proactive in this way enhances the efficiency of your overall operations.
5 best practices for inventory reconciliation
Ready to optimize your inventory reconciliation practices? Here are five strategies to help you stay efficient and accurate:
1. Use inventory management software
How frustrating would it be to complete an inventory reconciliation and later discover that the numbers still don’t match? Prevent this with inventory management software like Fishbowl, which automates reconciliation and reduces manual errors. With real-time tracking and seamless QuickBooks integration, Fishbowl ensures your inventory counts are always accurate, making the reconciliation process faster and more reliable.
2. Keep inventory organized
An organized inventory storage system is crucial for smooth reconciliation. Create designated storage areas, label items clearly, and keep all warehouse areas clean and easily accessible. This reduces the risk of miscounts and makes locating items during physical counts easier. As a result, you’ll have fewer discrepancies to resolve, saving time in future reconciliations.
3. Train your team
Ensure your team is well-trained in inventory management and reconciliation processes. With clear guidelines on performing counts, handling discrepancies, and using software tools, they’ll work more efficiently and accurately during inventory reconciliation.
4. Investigate discrepancies thoroughly
When discrepancies occur, don’t just sweep them under the rug. Thoroughly investigate the cause to determine whether items are missing due to theft, damage, or clerical errors. When you know why discrepancies are happening, you can address these problems and reduce the number you encounter in future reconciliations.
5. Set reconciliation schedules
Consistency is key when it comes to inventory reconciliation. Set a schedule that fits your business needs — for example, you might conduct a reconciliation quarterly or after receiving major shipments. For arbitrary checks, you might try to complete one each month. The more often you reconcile inventory, the quicker you’ll catch discrepancies and achieve accurate records.
But it’s vital to strike a balance — if you reconcile inventory too often, you’ll risk wasting resources on unnecessary checks, which slows down operations. Find a schedule that keeps your stock levels accurate without overburdening your team.
Transform your inventory reconciliation practices with Fishbowl
Fishbowl’s intuitive software simplifies inventory reconciliation. With real-time updates, seamless QuickBooks integration, and painless automation, Fishbowl ensures your inventory is always accurate.
Schedule a demo today — experience the ease and efficiency of managing your inventory with Fishbowl.