Proper accounting procedures and Federal Income Tax Regulations require that all inventory items are counted at least on an annual basis. While most retailers count their inventory at the end of their fiscal or accounting year (usually at the end of January or July), this is not required and may not be practical, especially if the fiscal year ends on the calendar year (required of all Individual Proprietors, Partnerships and Sub S Corporations) before final holiday clearance events and during a busy holiday and return season. As long as the entire company’s inventory is counted at least once each year, it is acceptable. Technically, even cycle counts are allowed as long as all inventory is counted during an annual cycle. Yet cycle counts may not be the best or most accurate way to count inventory.
The entire store and warehouse inventory can be counted at the same time OR a series of partial counts of logical parts of an inventory can be counted at any given time. This series of counts of only a part of the inventory is called cycle counts. The only requirement of using cycle counts is the entire inventory is counted at least on an annual basis. By logical parts, as mentioned above, I mean, for instance, in a men’s store, the clothing one month, the furnishings the next month, the sportswear the third month.
While periodic spot inventories can be very helpful, we do not recommend cycle counts as the sole inventory solution for most retailers. Put simply, the nature of the retail specialty store is not conducive to this method. It requires a rigorous effort to assure that all inventories are accounted for. No matter how well departmentalized a store might be, merchandise moves around too much. Customers move goods throughout the store, employees move it, and the nature of effective merchandising requires mixed merchandise displays. A particular group of merchandise can be displayed in several areas, several departments, or in various back-stock locations. Different merchandise is mixed throughout window and in-store displays. Particular pieces might be being held for a good customer or for alterations or repairs, even if they aren’t recorded as being out of inventory. Furthermore, when classification structures are complex or otherwise vague, confusion and missed counts can be a frequent problem
Complete physical counts will always be more accurate as they allow for a wall-to-wall counting methodology that will always be more accurate than using a count sheet or similar method to try to find inventory based on a pre-defined list.
However, spot counts can be very useful and important when supplementing annual or semi-annual complete physical counts. Where inventory is very distinct, well segregated in the store, or of high value, spot checks can be an excellent and effective way to monitor overall trends in shrinkage. They can also be helpful in identifying the causes of shrinkage and/or correcting inventories where problems are frequent or expected. For example, when out-of-season goods are transferred to a discount location or when a tent sale is held, taking a physical after the event can be an important tool for correcting values that can easily get out of line.
Spot inventories can also be useful in pinpointing the extent of obvious theft. For example, a crash and dash theft, and recounting the merchandise in a display that was pillaged can be useful not only to correct inventory levels, but to make an insurance claim. An obvious advantage of cycle counts is that the volume does not overwhelm the support staff and time can be allotted to tracing errors. Cycle counts can be used very effectively immediately following complete store count where unacceptable discrepancies have occurred in a limited area.
In the specialty store environment, the only real effective method to assure accuracy in a physical count remains written procedures for a well planned, organized and supervised wall to wall count of the entire store or stock location at one time. If a full inventory is taken at least once a year, spot inventories of select merchandise can be of great value and should be encouraged.
