It is that time of year…..no, I’m not talking about the holidays! If you are in retail, you know that ringing in the New Year also means it is physical inventory time.

The number one thing to do before inventory starts is to talk to your staff about how important it is to get an accurate number. Explain to them how it affects their job – they need to know that first. Tell them that if the number is wrong it impacts the store’s ability to serve customers. How do they feel when they tell a customer that an item is in stock and then it can’t be found on the floor? Ask them to give other examples about how an incorrect number can have far reaching consequences. You and I know that it also has a big impact on profitability but that isn’t how it impacts your staff first. When you address it from their perspective first, you will get more buy in from them.

Once the count is done, then the inventory variances must be dealt with. Clients always ask how to interpret that number. An inventory variance over 5% is significant. Let’s say you count out $10,000 of sweaters and your point of sale system states that you should have $9.000.

Here is the math:

(The amount you should have)
less (the amount you count)
divided by (the amount you should have)
multiplied by 100
should be less than 5%.
In this example: ($9,000-$10,000)/$9,000 multiplied by 100 = 11%.
So that is a problem.

The biggest problem with variances is to determine why they are there! If your physical count is greater than the “computer’s” number there could be a problem with the system, items may have been moved to other categories, etc. But, if your physical count is less than the “computer’s number, your biggest concern is theft or loss for some other reason.

Just be careful that you don’t assume loss by theft until you have looked at the department/summary variance to get the total actual deviations. It could just be that something was transferred incorrectly and that the total number is good

Also review it in the context of sales. Inventory variance (or shrink) should be less than1.5% of sales. Another way to look at it is if the maintained mark up (mmu) is 46% and shrink is 1.5% than mmu goes down to 44.5% (46% less 1.5%=44.5%). Remember you must take the difference in calculated vs. actual and divide it by the sales for the period between inventories.

The key is to look for the cause if you have a variance. Is it security, alarm, poor accounting procedure, an employee training issue, a poor process counting the inventory, or a variety of other issues. Think through the possible problems that may exist. Look for which direction the variance is in. Ask the questions of how it can happen. Brainstorm with your employees.

Is it missing or stolen? It isn’t always. How are vendor returns handled? I often find that they are accounted for correctly – especially if they are done infrequently. How does the owner track their purchases? If they aren’t rung up, they can cause a variance.

Maybe even think in terms of percentages of how much each possible way, the inventory could be off. For example, if the physical count is lower than the “computer’s” number, 10% lost due to theft, 20% lost due to poor accounting, 50% due to some other identified difficulty, and 20% due to employee problem. Once you have that, you might want to translate these thoughts (only thoughts) to dollar amounts. See if it seems possible for that many dollars could be accounted for in each way. You could divide that by how much time it’s been since your last physical and translate those thoughts to a per month basis, giving yourself another gauge on the possibility. Thinking through this way, will likely provide you some answers and an action plan to decrease it for next time.

Get it? It’s time to count your inventory?!