Inventory Reconciliation

When performing a physical inventory count, businesses perceive that inventory records and the outcomes of an inventory count seldom match. When they align, it is necessary to reconcile inventory records alongside the physical stock.

In this article, you will learn what inventory reconciliation is, its significance, how to reconcile inventory, decoding an inventory reconciliation report, and more related aspects.

What Is Inventory Reconciliation?

Inventory reconciliation matches inventory levels specified in a POS system with the physical inventory levels found in your warehouse and store. After the inventory reconciliation process, merchants can address discrepancies between the recorded inventory levels in POS and the total physical inventory counts.

Apart from calculating items and updating records, this process helps you determine stock discrepancies. Once these discrepancies are detected, you can resolve them.

If inventory reconciliation is carried out often, retailers can perfectly comprehend the reasons for discrepancies and take measures to avoid them in the future.

Why Is Inventory Reconciliation Important?

Merchants face an issue when inventory on hand doesn’t match inventory records. Although correct inventory management software is used, it is essential to detect shrinkage compared to recorded inventory levels which can’t be accounted for.
By frequently carrying out inventory reconciliation and cycle counting, it becomes easier to monitor shrinkage for merchants. Moreover, they can perfectly explore the reasons behind the discrepancies. The reason can be human error, such as imprecise inventory counts or mislaying items in the stock room. The other reasons can be supplier deceit or employee theft.

If your organization’s shrinkage rate increases from one inventory reconciliation to another, it might indicate that you must carry out a specific investigative effort. Also, it suggests that you need to implement some loss prevention tactics to ensure the shrinkage rate is as low as possible.

Thus, the importance of inventory reconciliation is realized when there is a need to control shrinkage rate, increase the accuracy of inventory counts, minimize missing shipments, and reduce supplier deception.

Reasons for Inventory Reconciliation

The inventory reconciliation process is crucial when you want to streamline your business operations. The following section discusses the reasons dir reconciliation:

Avoid out-of-stock, stock-out, and overstocking situations:

In certain conditions, your inventory records denote more inventory than is actually there. So, you might end up running out of goods and ultimately lose sales. But accurate data displayed by the inventory reconciliation process prevents out-of-stock issues.

The stock-out is where customers place their orders for items displayed in stock, but there is inadequate stock to meet the requested demands. Due to this error, you will lose customers. This error is controllable by the inventory reconciliation concept.

The reconciliation process guarantees your stock records are accurate. It prevents you from needlessly ordering new items because products are already available for sale in the stockroom. Hence, inventory reconciliation avoids overstocking.

Ensures data consistency:

LoreIf the frequency of resultant inventory reconciliation is high, it guarantees that the inventory processes are conveying consistent data. As a result, the business can stay away from understocking or overstocking.m ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Removes the risk of fraud or theft:

If there are accurate records of all items entering and leaving your e-commerce store, there will be a reduction in the risk of fraud and theft.

Demand forecasting:

Inventory reconciliation generates accurate records of your items for both past and present. Based on that data, you can determine the performance of various product categories and estimate future demands.

Increases inventory efficiency:

The inventory reconciliation process works on manual and automatic methods of inventory counting. Whenever the stock tracking processes are combined with the inventory management software, the task of counting inventory turns out to be more accurate and quicker. Thus, it will increase inventory efficiency and demand fewer employees.

Ensures smooth functioning of business:

If a business can maintain precise inventory levels via consistent data and efficient tracking, it can function smoothly. Moreover, it can emphasize expansion instead of resolving stock problems. The accurate inventory count also facilitates seamless business by guaranteeing that its item count, orders, and shipments are precise.

How To Reconcile Inventory: A 5-Step Process?

Several reasons are associated with why the inventory numbers in records mismatch with the inventory numbers in your warehouse. It is imperative to take the correct steps to discern the reasons for the same. Let’s get familiar with the 5-step process to reconcile inventory:

First Step: Know your physical inventory count

The number of physical items in your warehouse or shelves is always known. Before you check out your POS records, it is mandatory to check the physical inventory count. Usually, any organization can record the number of items in its inventory within a day or two.

The fluctuation in the actual inventory count and that shown in the POS record can be because somebody wrongly calculated or recorded it. Counting the physical inventory multiple times is recommended to ensure zero errors. Before proceeding to the next step, you must have a precise inventory count.

Second Step: Compare inventory records and physical count

After you get your accurate inventory numbers on the POS record, you need to compare them with the prevailing inventory records. Make sure these numbers are equivalent to the physical items available on shelves. While comparing, you will detect discrepancies, if any.

The mismatch between your recorded inventory count and physical inventory count can be due to various issues:

  • Human error
  • Maths errors
  • Missing paperwork
  • Unlisted items
  • Scrap items
  • Supplier deception
  • Items owned by a supplier or customer
  • Backflushing

You must evaluate all possible issues to detect the cause behind them correctly. You can note the reason for the discrepancy and fine-tune your recording process as needed.

Third Step: Check the inventory shipments since the previous reconciliation

If a stock reconciliation is conducted previously, you need to check back to know whether there were any discrepancies or not. Doing this demonstrates the disparity in numbers during the detailed reconciliation.

You need to assess your prior sales and delivery records to know if anything was unnoticed. In most cases, the discrepancies happen due to either a maths error or error while recording stock numbers. Shipment receipts can confirm these errors. But if no records are found to justify the discrepancy, then the cause might be fraud or burglary.

Fourth Step: Check the cause of discrepancies

Following the third step, you can know the cause of discrepancies since you can prepare a ‘stock reconciliation statement’ that illustrates the differences. You can prepare this statement in an Excel spreadsheet or inventory tracking system.

But if you can’t detect the cause of the discrepancy, getting opinions from your team is recommended. If you have tried all techniques and can’t see the reason for the difference, you would still have to reconcile your records. This is because you need to match the inventory records with the actual quantity of items in inventory and eventually refer to it as a loss.

Fifth Step: Consistently performing inventory reconciliation

Inventory reconciliation can only work if you check your inventory regularly. Consistently carrying out inventory counts leads to the high accuracy of inventory numbers and reduces inventory shrinkage. Consequently, it aids your business in saving money in the long run.

Depending on what strategy works best for your business, you can plan inventory reconciliations at consistent intervals. Since these can be tedious, you can expect delays in your business operations and sales and an increased budget for employee wages.

What Is An Inventory Reconciliation Report?

Along with knowing the basics of inventory reconciliation, you need to know what an inventory reconciliation report is.

An inventory reconciliation report reveals your net inventory stats for a specific period. This report can assess your inventory transactions to and from the fulfillment centers. These transactions can include products already sold, returned, removed, lost, damaged, and found. Furthermore, you can observe all your inventory transactions over the past 18 months from this report.

An inventory report helps you to understand different inventory events contributing to your ending balance. To make sure you can easily discern the prominent details, a report is provided for every inventory event. In this way, this report helps you to wholly reconcile inventory balances.

In other words, an inventory reconciliation report compares the physical stock present in storage and the inventory records. The report can help you recognize what caused the error in case figures are mismatched.

If the source of the discrepancy can’t be detected, the inventory records must be adjusted to reveal the actual inventory level.

Pros Of Addressing Inventory Reconciliation Reports

  • Guarantees accurate written inventory records
  • Helps recognize the source of discrepancies
  • Enables comparisons with industry benchmarks for inventory management
  • Enhances inventory tracking processes and avoids theft
  • Guarantees that all forms of inventory are separately recorded and incorporated in the written figures
  • Lets suppliers and staff investigate the cause of discrepancy either by location or product type
  • Measure the business’ performance in terms of rates of stock misplacement in proportion to industry benchmarks

Cons Of Not Addressing This Topic

  • Higher probabilities of inaccurate inventory metrics being recorded at stake
  • A higher likelihood of stock misplacement from the business is not acknowledged and continues to be overlooked.
  • Incompetence to compare the business performance with industry benchmarks
  • Incompetence to detect the reason for any stock loss

Conclusion

Inventory reconciliation is an accounting process that SMEs, SMB owners, startup owners, and respective accountants must perform. With this process, they stay confident that their accounts record accurate balances.

To ensure your business always deals with accurate inventory numbers, accurate and timely inventory reconciliations are imperative. Regularly conducting inventory reconciliation provides significant benefits like money-saving, theft prevention, enhanced operational efficiency, and ensuring customers get the required products.

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FAQs

Reconciliation in the supply chain is a comprehensive report showing errors and detecting vendors with a colossal mismatch. Those supplier(s) responsible for a vast mismatch can be marked as critical in the system. Hence, doing this will allow key suppliers to be dynamically tuned every month and monitored by the team.

If the organization can’t match the supplier invoice with the supplier statement reconciliation, it should reconcile with the supply chain automatically.

Following are the types of reconciliation:

  • Bank reconciliation
  • Customer reconciliation
  • Vendor reconciliation
  • Intercompany reconciliation
  • Business-specific reconciliation

If inventory records mismatch with the inventory on hand, merchants face difficulties. Even when the best inventory management software is used, shrinkage is unavoidable. Shrinkage can arise due to a shortage or surplus of goods in stock compared with those on record. By regularly reconciling inventory, merchants can better cope with loss and detect the causes for discrepancies. The reason can be an administrative error, human error (like inaccurate inventory counts or losing items in the stockroom), supplier deceit, or staff theft. Moreover, the inventory reconciliation process helps improve tracking processes and avoid theft.

As an inventory reconciliation example, suppose you are running a sports goods store. Assume that you use the seasonal method. You will count and reconcile running shoe inventory before the summer/spring season and winter boots inventory before the fall/winter season.

With this example, you can be confident that your inventory on hand is precise before you begin forecasting demand for a particular product category, providing purchase orders to suppliers, and replenishing before peak season.

The following steps help you prepare inventory reconciliation:

  • Count the products
  • Check your records
  • Study discrepancies
  • Track the cause(s) of the discrepancies
  • Reconcile your inventory records
  • Compare your results to earlier inventory reconciliations

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