Every business that involves the sale of physical goods has those goods stored somewhere. In addition to the shelves and backrooms of retail outlets, goods can be stored in distribution centers where they receive orders from suppliers or logistics centers where those items are shipped to customers. From time to time, all retailers have to verify that the goods they have on hand at any point in their supply chain match what their sales and inventory records say they should have.
This is a stock audit. It’s a necessary opportunity to identify where the numbers don’t match, investigate why and reset going forward. Any discrepancy between actual stock and the amount that sales records indicate that is allowed to grow too large before an audit can cause problems in order fulfillment and purchasing decisions. That’s why stock audits, despite their inconvenience, are a must.
We’re going to look into the specifics of the process of conducting a stock audit, learn why it is an important task that shouldn’t be overlooked by any retailer, and go over the exact procedure of auditing your inventory step by step.
Let’s start with the basics.
What is a stock audit?
Simply put, a stock audit, also known as inventory audit, is the process of verifying whether the physical goods available at your store’s warehouse match the results available at the stock registry.
Inventory audits can be conducted inside the company or via the outside auditors who can ensure maximized transparency in the results. Whether to hire a professional or to conduct a stock inventory by yourself is entirely up to you, unless the audit is part of a regulatory or licensing procedure. In this case, the specifics of the procedure will depend on the legislation of the country where your company and/or its warehouse is registered.
Why is it important?
Every business that relies on physical goods should be familiar with conducting inventory audits. However, stock reviews are particularly important for eCommerce operations, since their products can be scattered globally across various warehouses and logistics facilities. Here, a stock audit is the only way to track and manage all the products efficiently.
Here are some of the primary benefits of stock audits:
- Auditing inventory is directly related to your profit calculation. If some of your items are missing or misplaced, it’s the same as if money were missing or misplaced. That’s why investing in timely inventory is needed for accounting purposes and profit & loss statements.
- Stock audits can help you improve the financial health of your business. By conducting a thorough analysis of the current status of your physical goods and the frequency of their purchase, you can gain insights into parts of your inventory that sell poorly or underperform in any other way.
- Inventory management helps you prevent or identify fraud and/or theft. If your stock audit reveals any discrepancies between the recorded goods and their physical equivalents, it could be the result of these unfortunate aspects of inventory storage.
As you can see, stock auditing may become one of the most important procedures carried out by a business, as it reflects part of the current financial state of the company. More importantly, a thorough stock audit can help you solve existing issues as well as prevent future ones.
The stock audit process
While there is no one standard way to conduct an audit and the details will vary from operation to operation, there are some stages and activities that are common to most audits:
Forecast demand and stock up
The worst thing that could happen to you during the inventory audit would be running out of stock. After all, you don’t want to put your entire operation on hold while you’re conducting the audit. This isn’t always possible and some smaller operations are in a position to actually close down for a day but this can be a risky move. That’s why it’s essential to dig deep into the data you have on hand to anticipate the future demand before auditing.
Count the physical goods
There are different approaches and methodologies here. For example, you can go item by item and record every single thing you find on your warehouse’s shelf. To make things easier, you can run a cut-off analysis, where you put your entire business on hold during the audit, but there are a number of issues this can lead to.
Instead, you can try to conduct a cycle count, which doesn’t force you to count your entire stock all at once. With a cycle count, you can choose a specific type of product you want to audit during a specific timeframe. It may be less precise than the complete physical count, but it is much less disruptive on your operations.
Alternatively, you can run a spot check audit, where you only verify one or two products with the goal of identifying any issues with your recordkeeping. If no mismatches are found, you can conclude that your sources are up to date and your stock is intact.
These aren’t the only ways to conduct an audit but are among the most common methods.
Double-check your findings
Doing everything twice may seem like overkill, but in-stock auditing double-checking is a must. The human error factor is in play here and the scale of the job can often be too much to be trusted to a single source. This is why it’s essential to cross-check your discoveries.
Mix and match your auditing techniques (as long as you can justify the change), assign UPC codes or QR codes to each item to digitize the process for your future self, hire a helping hand - again, there are plenty of options you have to choose from here, just make sure that the final count is as precise as it could get.
Compare your findings with the financial records
After you’ve counted all the physical products you have, it’s time to compare your findings with the sales records. Any discrepancies or mismatches signal the beginning of the separate task of tracking down the source of the problem.
Stock audit checklist
To make things even easier for you, here’s a shortlist of questions you should ask yourself before, during, and after every stock audit you carry out:
- Has your physical goods audit been double-checked?
- Have any shortages been discovered in your stock and how can they be explained?
- Are there any items that have become obsolete since the last inventory verification?
- Has the stock proven to be too expensive to maintain?
- Are all the relevant rules and regulations properly documented?
- Are the financial records and inventory sources regularly updated?
- Is there an adequate process for documenting all incoming and outgoing materials?
- Are there any surplus items?
- Are they properly documented in the records?
- Are there any manual auditing processes that can now be automated?
- Is the level of any discrepancies less or equal to the expected numbers?
Challenges and solutions in inventory audits
Even if you follow our process step by step, there are certain procedural issues almost every stock auditor has to face at some point. Fortunately, these tend to be minor inconveniences you need to be aware of, rather than serious problems you should avoid at all costs by nature.
So, here are some of the most common issues with inventory audits:
- Stock management is time-consuming, since it requires a lot of attention to detail and manpower. That’s why the best way to ensure that you don’t fall victim to this flaw is to schedule auditing in advance and set a reasonable amount of time for it. Depending on the size of your operation, the procedure may take anything between several days to a few weeks.
- There is no real-time view of your inventory most of the time, so stock verification needs to be conducted periodically. Perhaps, running weekly or monthly auditing sessions would be overkill, yet making sure that the number of your physical items matches your sales documentation at least twice a year could save you some serious trouble.
- Most audit procedures cannot be automated and a lot of processes still need to be done by hand. There are certain auditing operations that can now be done with the help of dedicated software, so our primary advice is to invest in such a solution. Other than that, following the previous two pieces of advice should minimize the trouble from the remaining manual labor.
- Inventory audit often halts your other operations causing delays in shipments and generally being inconvenient. The best way to prevent that from happening is, again, to schedule your auditing in advance, as well as to rely on timely market research to forecast demand.
Running a stock audit is an essential procedure for every eCommerce business because it ensures that your entire operation runs smoothly and gives you an accurate view of your financial position.
While it is not required, audits performed by your fulfillment partner can prove to be helpful for you in the long run, especially if you run an international store with several warehouses scattered around the globe. Many logistics partners, including Omnipack, offer this as a service and can carry out inventory checks with minimal disruption to your operations. In that case, you will be protected against the major challenges in auditing.
Conducting thorough and regular inventory analysis can help you prevent fraud, enable better inventory management techniques, or even grow your revenue!