Inventory Reconciliation 101: How To Reconcile Inventory in 5 Steps

Is your business plagued by frequent stockouts, frustrated customers, and inventory management chaos? It might be time to get serious about reconciliation.

If you find yourself scratching your head and trying to figure out why you’re always out of stock of high-demand items, you’re not alone. We know how frustrating it is for you and your customers when the item they want should be in stock according to your system… but you have zero products on the shelf.

The answer isn’t to panic and do a complete inventory count — at least not without having a plan. You’ll likely uncover errors, returns not recorded properly, and items misplaced in the stock room.

Enter: inventory reconciliation.

This guide will walk you through the fundamental steps for reconciling your physical inventory with your system records. Arm yourself with the inventory management information you need to diagnose issues, reduce shrinkage, and optimize future inventory orders.

Inventory Reconciliation: What Is It?

Inventory reconciliation is the process of counting all physical inventory on hand and comparing the total to what’s showing in your inventory management system. You’ll audit stock across every product line to identify any discrepancies, and try to get to the bottom of why your counts don’t align with what your system indicates should be in stock.

You should perform inventory reconciliations regularly — keeping an accurate perpetual inventory system is crucial for making data-driven decisions about inventory orders and managing supply chains effectively.

Without reconciliation, gaps will arise between what’s physically in your warehouse and what your point of sale (POS) system thinks you have on hand. These gaps lead to frustrated customers, unnecessary markdowns when excess stock appears, and emergency reorders when stock “disappears.”

The benefits of inventory reconciliation are clear:

• You get visibility into inventory shrinkage and loss.
• You can diagnose issues like theft, damages, or process breakdowns.
• You’ll identify trends and recurring problem products by comparing them over multiple periods.
• You’ll improve inventory accuracy when you tighten security and fix errors.
• Your customers will no longer be frustrated by stockouts.

Not reconciling inventory can lead to theft and process errors going undetected. Excess stock ties up capital and stockouts cost sales. The snowball effect is inaccurate inventory data leading to incorrect reordering, and write-offs eat into profits when you finally discover losses.

Related Read: 3 Best Inventory Counting Methods for Small Businesses

It’s safe to say that inventory reconciliation is something you need to do to continue to grow and drive profits for your store.

Step 1: Take a Physical Inventory Count

The first step in reconciling inventory is performing a complete physical count of every item currently in stock. You’ll have to count by hand or scan every product, material, and supply — the entire inventory across all categories.

It’s best to schedule a time when your store or warehouse is closed so you can count accurately without customers entering and exiting. It might sound like a military operation, but you need a distraction-free zone. Divide and conquer by assigning staff to different sections or areas.

If you’re doing it by hand, provide count sheets. Or provide mobile devices for scanning barcodes. Methodically count everything, keeping a running tally. For high-value items like electronics, double-check quantities against recent purchase orders and verify serial numbers.

As counters complete each zone, you should record any overages or shortages and compare them against what should be on hand according to your software. Once a count is complete, have staff submit their count sheets to be compiled into a master list of physical quantities on hand for every item.

Step 2: Compare Physical Count to System Count

Once the physical count is complete, you can compare manually counted quantities to the system records for each item. To do this, you can upload the physical count master list into your POS or inventory management software.

Then, generate a system inventory report showing the on-hand quantity recorded for each product. Compare the counts, looking for any discrepancies where the manually counted quantity is higher or lower than what the system reports. It’s a good idea to calculate the total dollar value of the discrepancies — you’ll get a sense of the financial impact of inaccurate inventory counts.

For large inventories, it might not be feasible to count every single SKU. Instead, you can focus on high-value items and spot-check random samples from different areas. While not as precise, routine spot checks can indicate accuracy trends.

Using inventory software can streamline reconciliation. For example, barcode scanning captures physical quantities for uploading to your POS system. Automated reporting quickly compares physical vs. perpetual counts, flagging discrepancies for attention. There are ways to make the process easier; you just need the right tools.

Step 3: Research the Discrepancies

So you’ve identified any discrepancies between physical and perpetual inventory totals — what’s next? Getting to the root cause of the inaccuracies.

You’ll need to put your investigative hat on. You could review security camera footage for unauthorized access or inventory transfers. You could also audit purchase orders and sales records. Were there any errors in those transactions? Last, interview staff involved in the counting to potentially uncover process issues.

The main issues driving inaccuracies often fall into two buckets:

Theft or loss: It’s possible that theft by staff or shoplifters is going undetected. Review your security protocols around inventory storage areas and the shop floor. Are they watertight? Consider upgrading surveillance systems or implementing security tags to cut down on shoplifting. Proper loss prevention controls are crucial.

Related Read: Grocery Employee Theft: Is Your Team Stealing?

Data entry errors: Overages and shortages can also stem from incorrect purchase orders or sales transactions entered into the system. Make sure your process for documenting inventory receipts, sales, damages, and other stock movements is optimal. Identifying gaps that could allow errors and training staff on proper procedures is essential.

Diagnosing the root causes of discrepancies helps you implement targeted solutions. Reducing shrinkage and improving data accuracy should be on your list.

Step 4: Update Your Inventory Records

You’ve identified the root causes of discrepancies — now it’s time to adjust your point of sale records to match the physical count totals.

If you have overages where the physical count exceeds what’s in your system, add a manual inventory receipt to account for the excess products on hand. Create the receipt with the item and quantity overage amounts discovered during reconciliation.

In cases where physical inventory is lower than perpetual records, write off the losses so the system quantities match the actual verified stock. Document shrinkage amounts and reasons for each impacted product.

This process ensures that what’s in your POS system aligns with the physical count totals. New discrepancies will appear over time, but regular reconciliation should catch them.

Step 5: Analyze the Results

The final step of the inventory reconciliation process is analyzing your results. Dig into the discrepancies, losses, and errors identified this time and compare them to previous periods.

Look for patterns and certain products with frequent inaccuracies. Thieves often target small, high-value items like electronics, perfumes, jewelry, or perfumes because they’re easier to steal. Staff may also use clever tactics to process transactions fraudulently. Reviewing security footage and inventory processes should help uncover problem areas.

Related Read: 5 Essential Inventory Management Software Features (+5 Top Tools)

You can take various actions to improve inventory integrity, such as tighter security, upgraded inventory software, retraining staff, and revamping count procedures. Do what works for your store.

Inventory Reconciliation: Get Started With the Right Tools

The steps we outline in this guide are easy to follow and will help create a process. Count your stock, compare it to your inventory records, find discrepancies, adjust your inventory, and analyze over time. It’s not a quick or easy process, but having an accurate inventory is worth it.

Keeping accurate inventory records means continuously analyzing your stock levels, sales data, and purchasing history. With this ongoing analysis, you can identify discrepancies and fix them quickly.

The right tools simplify regular reconciliation, while improving inventory management processes. Barcode scanners capture counts quickly, inventory management software centralizes your data and automates reporting, and robust POS systems seamlessly integrate physical and perpetual data.

POS Nation offers hardware and software tools to help you with every stage of your inventory management process. Along with other capabilities like sales tracking and customer management, our retail POS system is an all-in-one solution for your business needs.

Check out our offerings and schedule a demo to see how our software can simplify your inventory processes.