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Taking stock of your stock: What is an inventory audit and why is it important?

March 27, 2024 | Published by Faire

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Keeping your store running smoothly means regularly taking stock—figuratively and literally. Inventory audits are part of maintaining a healthy retail business. If it’s been a few months since you itemized every product on your shelves or in storage, it’s probably time for an inventory audit. Let’s walk through what an inventory audit is (and isn’t), why it’s critical to conduct, and the steps for doing so successfully.

What is an inventory audit?

An inventory audit checks if your financial records match up to the physical items in your store. That often means counting and cataloging each product on your shelves and storage area and comparing it to your digital or hard-copy ledger. 

Besides accounting for the existence of items, audits are also when you might check on the status and quality of your products. Has anything broken? Is anything expired?

Why are inventory audits important?

Inventory audits are vital tools for independent retailers and can uncover discrepancies in your stock before they become problems. Here’s how: 

Ensuring accurate stock levels: Your records should always match the products you actually have in your store. Regular audits keep stock levels accurate, which lets you plan with confidence. 

Syncing between platforms: If you sell through multiple channels—maybe online, at special events, and in your shop—you need to know what it’s time to reorder. You want to make sure that whenever you go to pack up an online order, you have the right items in stock. Using one platform for everything can help keep your numbers consistent and streamline your workflow.

Detecting discrepancies: Inventory audits should be part of an overall loss-prevention strategy, whether they’re caused by theft, damage, or even data-entry errors. Imagine planning a big sale only to realize that half the items are missing. By identifying problems early, you can take steps to prevent them from snowballing. 

Being a strategic wholesale shopper: Audits give you the data you need to make informed decisions and plan your inventory turnover. For example, if you keep selling out of something, you know it’s a good idea to order more. If a product is gathering dust, there’s no need to reorder … and you might want to revitalize that inventory. This kind of data can help you manage your budget more effectively and plan for future sales and promotions.

Types of inventory audit procedures 

Several methods can be employed to conduct inventory audits, each with its own set of advantages and applications. This comparison table can help you find the best one for your store: 

Procedure How it works Best for
ABC analysis Categorizes inventory into three groups (A, B, and C) based on its importance, allowing you to focus your auditing efforts where they’re most needed. Businesses looking to prioritize their auditing efforts on high-value items.
Cut-off analysis Ensures transactions are recorded in the correct accounting period for accurate financial records. Ensuring financial accuracy and compliance with accounting standards (monthly, quarterly, annually).
Cycle count Regularly counts a small portion of inventory so that every item is audited at least once within a specific time frame. Retailers who want to audit without disrupting daily operations, suitable for all sizes.
Perpetual A continuous review of inventory records supported by regular physical counts to ensure ongoing accuracy. Businesses with high-volume sales or valuable inventory that require constant monitoring.

6 steps to a successful inventory audit

Combing through all your merchandise can feel like a big task, but with thoughtful planning, it becomes part of the normal routine of running a store. Here’s a guide to help you through each step of the process and become an expert inventory auditor. 

1. Prepare your data

Take a look at your current inventory spreadsheet. If you don’t have one, you’ll need to make one. Include columns for Stock Keeping Units (SKUs), product descriptions, order dates, retail prices, cost prices, and the current quantities on hand for each item. 

Make sure your inventory system or ledger is up to date with recent sales, returns, and new stock arrivals. This will be your audit’s baseline for comparison. Consider using inventory management software to streamline this process. It can also be as simple as an organized Excel or Google Sheets document. 

2. Schedule a time for the audit 

Inventory audits should ideally be conducted during periods of low activity in your store. Early mornings before opening, after closing, or on days your store is closed are ideal. You might also check your business calendar for any low-traffic periods or use sales data to identify traditionally slower days for your store.

3. Gather and brief your team

If you have employees, schedule a meeting to explain the importance of the inventory audit, the process, and the specific roles they’ll play. You’ll want to assign specific areas or categories of products to each team member to make the counting process more efficient. For solo operators, consider asking for temporary help from friends or family if your inventory size warrants it.

4. Count and record items

Start the physical count, making sure to check all areas where inventory might be stored, including the sales floor, back stock, and any off-site storage. Be thorough. Check under shelves, inside display units, and anywhere else items might be overlooked.

Use your prepared spreadsheet to record the actual quantities of each item. A barcode scanner can significantly speed up this process, but manual counting is equally effective.

5. Double-check your work

Once the initial count is complete, take time to verify the accuracy of your findings. Having a different team member recount a selection of products can help ensure accuracy. Pay special attention to high-value items or those with historically problematic stock levels.

6. Analyze your findings

Compare your physical count results with the data in your spreadsheet. Note any discrepancies and investigate potential causes, such as theft, damage, or clerical errors. Identify patterns in the discrepancies. Are certain items consistently over or understocked? This can reveal insights into sales trends or inventory management issues.

Schedule future audits

Based on your audit findings and the nature of your inventory turnover, decide on a regular schedule for future audits. Monthly, quarterly, or biannual audits might be appropriate depending on your specific needs.

Mark these future audit dates on your calendar and plan to prepare your team and operations around these times. Knowing exactly what’s on your shelves will build your confidence as a retailer. It’s like having a map and compass in the wilderness—it just makes the journey less stressful.

Are you a new retailer? Read more about Open with Faire and learn how to apply for up to $20,000, with 60-day payment terms, to stock your new shop.

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