A Comprehensive Guide on Inventory Reconciliation

Key Takeaways:

• Inventory reconciliation aligns recorded stock levels with actual physical counts to ensure accuracy and minimize losses.
• Regular inventory reconciliation prevents stockouts, overstocking, shrinkage, and revenue leakage.
• Methods of inventory reconciliation include full physical counts, cycle counting (ABC method), spot checks, seasonal counts, and perpetual reconciliation.
• Automating reconciliation with AI, IoT, and RFID reduces manual errors and achieves near 99% data accuracy.
• Recogent streamlines reconciliation with automated stock matching, real-time dashboards, and AI-powered insights.

Are frequent stockouts making it hard to fulfil customers’ demands on time?

Do you often face customers getting frustrated when their orders for items shown as available online turn into backorders upon checkout?

Are unexplained inventory losses and lost sales opportunities eroding your profit margins?

If yes, you are not alone. Even leading brands occasionally face inventory mismatches and shrinkages.

So, the question is: How can you overcome this inventory management chaos?

Fret not, as there’s a solution: inventory reconciliation.

This guide walks you through all you need to know about this concept. Here’s what you will read:

What Is Inventory Reconciliation?

Why Is Inventory Reconciliation Important?

What are the Common Inventory Reconciliation Methods?

What Are the Tips to Reconcile Inventory?

How Recogent Is Transforming Inventory Reconciliation?

Frequently Asked Questions (FAQs)

What Is Inventory Reconciliation?

Inventory reconciliation is the process of comparing your recorded inventory count against your physical or actual stock counts. This process helps identify and address discrepancies, ensure data accuracy, and prevent losses due to theft or damage.

Reconciling inventory also enables making informed purchase or sales decisions to maintain optimal inventory levels while preventing stockouts/overstocking.

Why Is Inventory Reconciliation Important?

Inventory reconciliation is crucial as it helps enhance inventory accuracy, optimize stock levels, improve forecasting, and safeguard assets against loss/theft.

Below are the benefits of inventory reconciliation discussed in detail:

1. Improved Inventory Accuracy and Decision-making

Your inventory data directly influences your sales/purchase decisions that impact cash flow and revenue. Regular reconciliation helps ensure that this data stays accurately updated, enabling timely and informed finance-related decisions.

For instance, reconciling inventory enables you to identify which products are running low on stock so you can reorder them. It helps prevent ordering items that are already available, avoiding unwanted costs associated with unsold inventory.

2. Prevention of Inventory Shrinkage

Inventory shrinkage refers to the unexplained loss of a company’s physical inventory due to employee theft, shoplifting, or supplier fraud. It means that the actual inventory count is less than what your records show.

When you reconcile inventory regularly, you can detect potential shrinkage proactively. You can then investigate the reason, identify whether it’s internal or external (such as employee theft, shoplifting, or supply fraud), and take suitable remedial measures.

3. Enhanced Customer Satisfaction

What if your customer ordered something you don’t have or can’t deliver within the expected timeline?

Inventory reconciliation helps detect and eliminate discrepancies between your recorded and actual inventory, ensuring that customers view only what you truly have. It, thus, prevents delivery delays, backorders, or cancellations.

Thus, reconciled inventory helps minimize wait times and ensure timely order fulfillment, contributing to improved customer satisfaction.

4. Better Financial Reporting and Management

When you compare your inventory records with your physical item count, you can identify and minimize mismatches or discrepancies. It, thus, helps ensure accurate inventory records, which form the cornerstone of error-free financial statements; and it builds trust among investors, creditors, and stakeholders.

Well-organized inventory records with proper approvals and explanations save auditors the time spent on scrambling for required documentation, shortening audit cycles and strengthening compliance.

5. Higher Operational Efficiency

The efficiency of your inventory management depends heavily on the accuracy of your inventory data. By knowing what you actually have and what your records show, you can identify and fix discrepancies.

With clear visibility into your inventory, you can also plan procurement, production scheduling, and pricing strategies accordingly. It reduces the need for emergency orders, prevents warehouse congestion, and enhances supply chain operations.

What are the Common Inventory Reconciliation Methods?

Various inventory reconciliation methods include a complete physical count, cycle counting (also known as ABC analysis), spot checking, just-in-time (JIT) reconciliation, and seasonal.

1. Full Physical Count

As the name suggests, the full physical count method involves counting all your inventory items actually available and comparing them against digital records. You can do it either manually or using barcode scanners or RFID technology.

While the full physical count provides detailed insights into your inventory, it may be tedious for organizations with large inventories, especially if done manually.

2. Cycle Count (or ABC Method)

Also known as ABC analysis, the cycle count method involves dividing your inventory into subsets (A, B, C) based on their value and setting different frequencies for their counting accordingly.

Generally, the frequency of the products representing the largest portion of your revenue is the highest.

You can divide your inventory into these categories:

• A-grade inventory: Items that account for 80% of your revenue
• B-grade inventory: Items that account for 10% of your revenue
• C-grade inventory: Items that account for 5% of your revenue.

As the A-grade inventory brings the most revenue, you can count it monthly. For the B-grade inventory, you can schedule its counting on a quarterly basis. The C-grade, being the lowest revenue-generating, can be counted every six months.

While you can focus on high-value products to ensure they are always available in the ABC analysis method, you can find classifying products tricky.

3. Spot Checking

Spot checking (also known as arbitrary inventory checking) involves picking a random set of inventory items and comparing them against digitally recorded stock levels. In this method, you don’t have a predefined way to count your inventory, meaning you can pick any arbitrary approach to count your inventory.

For instance, you can randomly count your inventory every Friday or when your store registers the lowest sales. Whichever way you count inventory is up to you.

While spot checking is quick and proactive in catching errors, it doesn’t give a complete picture of your inventory. Moreover, major issues like fraud or theft may go unnoticed in the inventory you don’t count.

4. Seasonal Method

The seasonal method of reconciling inventory involves counting inventory based on seasonal fluctuations in demand. It suits businesses that have items with a predictable and recurring high or low demand every year.

The seasonal inventory reconciliation ensures that your in-demand products are available in adequate quantities before the peak season begins. However, you may need more labor and time for it, especially when you have large volumes of seasonal items.

5. Perpetual Inventory Reconciliation

The perpetual inventory reconciliation involves comparing actual or physical inventory counts with real-time records on an ongoing basis. This method actively tracks and updates inventory counts in real time, rather than periodically.

Automating perpetual inventory reconciliation through the use of inventory management software like RFID tags, barcode scanners, or an AI-based reconciliation solution.

While the perpetual inventory count ensures real-time inventory visibility, it is more complex and incurs higher setup costs due to the advanced technology. This method suits large-scale operations requiring continuous stock visibility.

How to Conduct Inventory Reconciliation: Step-by-Step Guide

Inventory reconciliation involves conducting a physical inventory count, comparing it against system records, identifying discrepancies, and updating system records to reflect reality.

Here are the steps discussed in detail.

1. Count Your Physical Inventory

The first step in reconciling inventory is to count all your physical inventory items across all storage locations or sales channels. The time you need for this step depends on how large your inventory is and how many SKUs you carry.

Pro Tip: Plan and prepare beforehand by organizing your stockrooms, storage locations, and retail stores, determining who will do what, and keeping inventory lists ready. It will help you expedite this step involving the physical inventory count.

2. Compare Your Physical Counts against Digital Records

Once you have the physical inventory count, it’s time to match the quantity of each item against what your system shows. This comparison helps you determine if there’s a difference in the physical and recorded stock counts.

3. Identify Discrepancies and Investigate Their Causes

Once you have identified discrepancies, it’s time to investigate further to determine the cause and take appropriate action.

For instance, if you find that items of a specific size or style are fewer than what the records display, you can do these things:

• Review your purchase orders.
• Count the inventory you received.
• Find the sales figures between your current and previous reconciliation.

You should then see if you have received a product in a quantity that is more or less than what’s in your system. Additionally, you can check for errors in serial number entries or mislabeled receipts or invoices.

Other possible causes of discrepancies during inventory reconciliation include:

• Misplaced or forgotten items
• Unrecorded damage or spoilage
• Data entry errors
• Issues with the synchronization of inventory count across multiple sales channels

If you don’t find any internal issue causing the discrepancy, you might want to consider the possibility of theft or fraud. To trace its source, consider interviewing

your employees, especially those directly involved with inventory processes. You can further check your security footage regularly to see if there’s any clear evidence of shoplifting.

Pro Tip: Prioritize discrepancies to find the reasons behind potential variances, especially when high-value items are involved, followed by minor aberrations.

4. List Down Discrepancies and Update Digital Records

Whether you find the source of shrinkage or not, compare the physical count you conducted against the recorded inventory levels. Calculate your inventory shrinkage rate, the total cost and retail value of shrinkage, and the total cost and retail value of the actual inventory.

You must further document the entire reconciliation process, including the discrepancies and their causes. Update your digital inventory records to ensure they accurately reflect your inventory on hand. You can also keep an audit-ready document ready for future reference.

Last but not least, analyze your results to catch any patterns, trends, or recurring issues in your inventory processes. Accordingly, you can take remedial measures to minimize similar problems in the future.

What Are the Tips to Reconcile Inventory?

The best inventory reconciliation practices include conducting regular counts, maintaining a well-organized inventory, utilizing inventory reconciliation automation technologies, tracking your inventory shrinkage rate, and providing staff training.

Let’s find out more about these best practices at length.

1. Count Your Inventory Regularly

Don’t treat your inventory counting as a one-time process or something that you can do only occasionally. Instead, you should make it a habit to schedule inventory reconciliation at regular intervals.

The larger and costlier your inventory is, the more frequently you should count it so you can catch issues early on. You can schedule your inventory in parts as well, where you reconcile high-value inventory more frequently than medium-value or low-value items.

2. Organize Your Inventory Well

What if you entered a storeroom with multiple types of items spread haphazardly across shelves and counters with no proper labeling? How hectic would it be to count items? That’s why you must keep your inventory properly sorted and well-arranged.

Here are some ways to keep your inventory well-organized:

• Categorize your products by type, revenue-generating potential, sales frequency, or any other prespecified criteria.
• Use proper labels for shelves, aisles, and other storage locations so it is easy to locate them.
• Keep your warehouse or storage room floor clean and decluttered.

3. Utilize Inventory Reconciliation Automation Technologies

Chances of human errors go up when you sit with pen and paper or depend on just Excel spreadsheets.

Therefore, consider implementing technologies such as inventory management software, barcode scanners, and RFID technology. It will help minimize errors and enhance data accuracy.

4. Track the Shrinkage Rate Post Each Reconciliation

Your inventory shrinkage percentage is a clear indicator of the scale of revenue loss. Therefore, you must calculate and compare the shrinkage rate against the previous numbers.

It will help you see whether your shrinkage rate is increasing, decreasing, or staying constant. Ensure you stay vigilant and dig deeper to identify and minimize issues in case your shrinkage rate has gone up. Ideally, you should aim for shrinkage rates of less than 1%.

5. Train Your Team on Inventory Reconciliation Best Practices

A leader is as good as their team. You can’t expect to enhance your inventory reconciliation unless your team follows a proper approach. Therefore, ensure you

establish clear guidelines for conducting inventory counts, addressing discrepancies, and using software tools.

Stay abreast of the latest inventory reconciliation trends and educate your team so they incorporate them to work more efficiently.

How Recogent Is Transforming Inventory Reconciliation?

You can’t expect to ensure 100% error-free inventory reconciliation if you do it manually. Mismatched stock counts, unrecorded misplaced items, or even simple data entry errors can waste your reconciliation. The result? Frequent stockouts, overstocking, and lost sales opportunities.

Recogent is an AI-powered solution that integrates with financial systems to streamline the process of reconciling inventory.

1. Event-Based Data Integration

Recogent captures data from sales orders, purchase orders, warehousing software, and POS terminals. It, thus, provides a unified view to track real-time stock movements.

2. AI & IoT Processing

You can pair Recogent’s AI-based algorithms with IoT sensors, barcode scanners, and RFID feeds. It helps track stock counts in real time, which simplifies your reconciliation.

3. Automated Stock Match

Recogent compares your ERP system records against your actual inventory levels. It then flags mismatches and discrepancies so you can investigate them further to find the reason.

4. Centralized Data & AI-Based Insights

Recogent stores reconciled data records and provides AI-powered real-time dashboards and reports. You can analyze them to get insights into demand forecasts, stock optimization strategies, and reorder recommendations to improve future decisions.

Conclusion

Inventory reconciliation is key to ensuring smooth inventory management operations. If you fail to do it efficiently, you are sure to face unexplained inventory shrinkage, reducing profit margins, and customer dissatisfaction.

The good news: you can automate and enhance your inventory reconciliation using AI-powered technology solutions like Recogent.

With Recogent’s AI-powered accounting software, you can make your reconciliation faster, better, and more efficient. The result? Up to 99% inventory data accuracy! After all, that’s what you’ll love to achieve, won’t you? So, wait no more and make it possible right away with our reconciliation solution.

Frequently Asked Questions (FAQs) on Inventory Reconciliation