Inventory control strategies maximize the flow of goods into and out of your facility, stabilizing cash flow and boosting profitability.
But you can’t implement such strategies until you achieve inventory accuracy, which requires knowing how many units of each SKU you have and how fast or slow they’re moving.
Learn the inventory accuracy formula and uncover tips to maintain more accurate and reliable stock counts.
What’s inventory accuracy?
Inventory accuracy is a key performance indicator (KPI) that measures the precision of your stock counts by comparing the number of items you have against the number recorded in your database. Perform an inventory count and review your data to ensure the two numbers match. The closer your recorded number is to actual inventory, the more accurate your inventory.
Low inventory accuracy can result in stock outs, higher costs, and unhappy customers, so it’s vital to regularly measure inventory accuracy and, if necessary, adjust your recordkeeping strategies to address discrepancies.
The importance of inventory accuracy
Maintaining accurate inventory is challenging, especially when managing stock across multiple stores — but failing to maintain accurate counts is detrimental to the health and performance of your business.
Plus, when you excel at maintaining inventory accuracy, you’ll enjoy several business benefits, including those outlined below.
Happier customers
When customers visit your website or physical store to place an order, they expect you to have their desired products in stock. Optimizing inventory accuracy lets you meet customer demand by reducing the likelihood of a stock out and guiding your reordering strategy.
Keeping your records accurate also promotes better product quality. If you deal in perishable or fragile goods, for example, you can optimize your reordering practices to reduce the time each product sits on the shelf. When customers purchase one of these items, it will be fresher and of better overall quality.
Less chance of stock outs
Inventory accuracy also plays a role in preventing stock outs and its equally problematic counterpart, overstocking. Minimizing stock outs leads to better sales, as you’ll always have the goods on hand to fulfill customer orders.
When your physical count and digital records match, you know it’s time to reorder, meaning you can stock more items before running out. A mismatch between physical inventory and your records might cause you to miss reorder points and run out of stock before your next shipment arrives, preventing customers from placing orders.
Reduced storage costs
A discrepancy between your recorded inventory and actual physical stock levels may result in a shortage — but an overstock can also be dangerous for your operating costs.
If your inventory logs indicate that you don’t have enough stock, but your warehouse has lots of goods on hand, you may reorder too soon. The result is overstocking, which damages liquidity and drives up your storage costs.
Maintaining high inventory accuracy helps prevent both sets of challenges. You’ll order just enough goods to meet demand without driving up storage costs.
Challenges of inventory accuracy
Inventory discrepancies stem from flaws with your systems, storage strategies, and quality control processes. Let’s explore a few such issues.
Inventory shrinkage
Inventory shrinkage occurs when you lose inventory due to non-sales-related activities, such as product damage, theft, or lost deliveries. Perishable goods expiring before they’re sold also contributes.
While preventing all shrinkage isn’t always possible, stringent quality-control processes and diligence minimize it. Log everything, store products properly, and choose reputable carriers to minimize the chance of loss in the production and shipping process.
Poor inventory management systems
Poor inventory accuracy will be a recurring headache if you use antiquated inventory management technology (or, worse, manual accounting processes). The good news? It’s an easy fix.
Upgrade to a modern cloud-based inventory management solution and watch your accounting efficiency skyrocket. By pairing robust inventory accounting tools with established best practices, you can maintain a rolling count of your stock levels and achieve up-to-the-minute insights into product availability.
Sub-par inventory storage
A disorganized warehouse or storage area makes maintaining an accurate inventory count challenging. Sub-par storage practices are particularly common among small business owners relying on storage units, home garages, or other non-traditional solutions for managing stock. Having less room might lead to poor organization or mishandling of objects, increasing the chances that product gets damaged before you can sell it.
If you haven’t already done so, consider moving your stock to a warehouse or other specialized storage facility. Working with a third-party logistics (3PL) or fulfillment provider can also help eliminate storage issues.
How to calculate inventory accuracy
There are two ways to calculate accuracy for your inventory. Both strategies use a variation of the same standard inventory formula:
Inventory accuracy = (counted items/items on record) x 100
The methods differ in how they gather numbers for the calculation. Here’s an overview of each and how and when to use it.
Physical inventory counting
A physical inventory counting process requires your team to walk through the warehouse and manually count every unit. As you might imagine, this takes quite a while and opens the door for accounting errors, especially if you maintain a lot of SKUs.
Execute this approach by splitting your warehouse into zones. Then, divide your staff into smaller teams and assign each group a specific section. At least two people should count the goods in their assigned zone. If they don’t arrive at the same figure, they’ll need to recount until they reach a consensus.
Let’s say you perform a physical count and have 980 SKUs in stock. Your records indicate that you should have 1,000 SKUs in stock. According to the inventory accuracy formula, you’d divide 980 (counted items) by 1,000 (items on record) to get 0.98, then multiply your results by 100. The final result is 98% accuracy.
Inventory valuation
The inventory valuation method scans every item to total up how much they’re worth, then compares that to the recorded value of your inventory.
Let’s use the same number of items we did in the previous example and say that each item is worth $5. Since you have 980 items in stock, the actual value of your inventory is $4,900. Your inventory records suggest you should have $5,000 worth of stock.
When using the inventory valuation method, you’d divide the actual stock value by the recorded value ($4,900/$5,000), then multiply the result by 100. Again, the result is 98% accurate.
Best practices for achieving inventory accuracy
Unreliable inventory records signal a need to revise your stock counting methods and frequency. Here are a few best practices to consider implementing.
1. Count often
You should count your stock early and often to minimize inventory discrepancies. The higher your inventory turnover and the more SKUs you have, the more frequently you should run counts. Doing so lets you detect errors sooner.
2. Use a cycle count method
Cycle counting involves counting segments of your inventory on specific days. This lets you skip extensive, company-wide counts by allowing for regular checks to ensure inventory logs are accurate. Dividing your storage area into four zones and counting one zone per week is a great way to make inventory checks routine but manageable.
3. Enhance inventory security
Improving inventory security and quality control reduces shrinkage due to loss, theft, or damage. Prevent shrinkage by storing goods properly and implementing careful handling procedures.
4. Use professional storage methods
If you’re storing goods in your garage or a storage unit, it may be wise to invest in professional alternatives to minimize damage and increase visibility into your inventory count. Leasing warehouse space can be cost-effective by preventing shrinkage and helps keep your stock organized.
5. Hire a fulfillment partner
Working with a 3PL or fulfillment partner shifts the burden of maintaining inventory off your team. A good fulfillment partner should have the necessary resources, infrastructure, and expertise to maintain a high level of inventory accuracy.
6. Invest in better tech
The importance of high-quality inventory management software can’t be overstated. The right software will provide real-time visibility into your stock and give you the tools you need to improve overall business efficiency.
Enhance your inventory accuracy with Fishbowl
Ready to improve inventory accuracy and leave manual stock counts behind for good? Fishbowl, the ultimate solution for precision in supply chain management, offers unmatched control and accuracy in inventory management.
Fishbowl also features QuickBooks integration, making it easy to unify your stock and financial data. Track products, get notifications when inventory is low, and create purchase orders, all from one convenient platform. Book a demo today to learn more.