Inventory Audit for Businesses

February 9, 2024

Every business must keep proper records, maintain their inventory at optimum levels and of course maximize its profits. However, when there are so many steps involved, it's easy to be overwhelmed and put off reviewing the stock for another day. This guide will take you through the process of inventory audit; from the first stage of planning and preparing, to execution and final analysis; providing useful tips and best practices to help your small business have a smooth and fruitful audit.

What is an inventory audit and why is it important?

An inventory audit is a physical count of your goods in stock, obtained for comparison purposes with accounting records. What are the benefits that it brings? Increased understanding of stock flow, improved calculation of profit and loss, and ease of planning. Regular inventory audits are crucial for:

• Finding discrepancies

• Identifying lost, stolen, or damaged items and preventing inventory shrinkage

• Optimizing stock levels

• Avoiding stockouts and overstocking, ensuring you have the right amount of inventory to always meet demand, and optimize storage space

• Better budgeting and forecasting, and improving cash flow

• Knowing which items are more popular and making the right decisions about purchasing and production based on accurate inventory data, avoiding stockouts, and stopping buying surplus items.

The best practice is to use the inventory checklist and keep doing audits year-round. A full inventory audit can be time-consuming, and inventory management software can greatly help this process, increasing its accuracy, maintaining and organizing various categories, and simplifying budgeting and planning.

Inventory audit best practices

How to conduct a general inventory audit on all or some of your stock?

Step 1: Plan and get prepared

• Define clear audit objectives and scope: Do you want to know what items are in the inventory? Are you looking for the most popular items? What percentage of items are damaged? Prepare a checklist for these objectives.

• Choose the right audit method: full count (record every item), cycle count (do a few cycles, checking selected products on each cycle, eventually covering the whole inventory), spot checking (only specific products or categories).

• Develop a detailed audit schedule and assign roles and responsibilities: Will dedicated personnel perform the inventory audit? How many hours will be dedicated? How often does the audit need to be performed? What will be the schedule?

• Choose the method of keeping the record and analysis: manual with pen and paper or electronic with inventory management tools.

Step 2: Execution

Conduct the audit according to the planned schedule and procedures defined during the planning phase. Take notes of any discrepancies and challenges, so improvements can be made at the next audit. For example, if there are any barcodes or labels that fade with time, making them unreadable; if any storage conditions are affecting the quality of the products; or if there are any unaccounted items.

Step 3: Analysis and follow-up

• Review the audit results and identify trends and areas for potential improvement: review discrepancies between records and actual quantities, and compare invoices with the shipping log.

• Implement corrective and preventive actions to address the issues identified and make changes. Changes can be made to the inventory itself: improve labeling, storing, organizing, shipping and receiving procedures, to the next inventory audit process if needed.

Additional tips for a successful inventory audit

• Involve key personnel: Get buy-in from all departments involved in inventory management to gain insights into potential audit objectives and to keep everyone aligned on the process and the outcome.

• Standardize processes: Establish clear procedures for counting, recording, and reconciling inventory data so they can be reused and improved in the future, and the data is consistent regardless of who runs the audit.

• Leverage technology: Utilize inventory management software to automate tasks and improve data accuracy. With the right tools, you will be able to see the accurate count, prevent overstocking, optimize storage and costs, save time and money.

• Run regular audits: Run regular audits to keep inventory records accurate, have better oversight of your inventory, and save by reducing excess and unnecessary inventory.

With these inventory audit best practices, your stock can be used in a way that optimizes your flow of goods, gives you a better insight into your inventory, and enables you to maximize your profit.