Inventory reconciliation is one of the most important, but often overlooked, aspects of running a retail business. As many retailers know, inventory records and the results of an inventory count rarely match. However reconciling inventory records against the physical inventory in stock is essential in providing a clear, real-time picture of your stock.

Inventory reconciliation is an important all-year-round task, but its significance is even higher for many seasonal retailers as they migrate from summer to winter collections. But what is inventory reconciliation? Why is it important? And how can you reconcile inventory records?

What is inventory reconciliation and why is it important?

Essentially, it’s the process of matching inventory in your point of sale (POS) system with the physical inventory on your shop floor or stockroom. It helps retailers understand what stock they have (and where), how effectively their business operates in-store, online and omnichannel, and helps reduce the impact of ‘shrinkage’.

When inventory reconciliation reports don’t match records of the actual inventory available, problems can occur. Consider shrinkage, which occurs when you have less items in stock than you realise, as a result of the likes of administrative errors, product damage or even theft. While it’s not possible to eradicate shrinkage entirely, by cycle counting and reconciling inventory frequently, your business can better uncover the causes and reduce the impact.

If your shrinkage rate grows from one inventory reconciliation to the next, it may be a sign that you need to investigate the causes and establish strategies to minimise the impact. Every item lost or unaccounted for is an item you can’t sell, after all. And today, as economic pressures continue to bite, every sale is important. So treat inventory reconciliation as an important part of revenue forecasting and cash-flow, and also a matter of best practice. For example, it can help minimise the risk of you telling a customer an item is in-stock, based on your online inventory, only to find out that it actually isn’t.

How does inventory reconciliation work?

There is no one-size-fits-all play-by-play, but there are a number of common steps. First among them is a physical inventory count, typically performed by an assigned employee or team who counts the inventory levels of each item – on both the shop floor and store room – and records the results. Inventory counts can be either a ‘full inventory count’, where you count every single item in stock, or a ‘cycle count’, which are smaller, more regular and don’t require masses of time (or the closure of your store).

Next is comparing the results of this physical inventory count to the inventory levels recorded in your POS. Then it’s crucial to investigate missing items and pinpoint the source of discrepancies, which might include poor paperwork or an item that’s regularly damaged when handling. Many retailers find bigger discrepancies if they’re using antiquated methods such as pen and paper or a spreadsheet. It’s far easier to minimise the discrepancies and maintain a real-time and long-term picture of your inventory with a cloud-based POS system like Lightspeed.

How can you carry out your own inventory reconciliation?

Inventory reconciliation can feel tedious, time-consuming and even unnecessary but it’s essential for maintaining accurate inventory levels and ordering the right products at the right time to meet demand. There are many methods, though, depending on your operation. The ABC method sorts your inventory into three buckets: A, B and C. ‘A items’ could be the most popular items or those with the highest discrepancies, and are counted most frequently. They’re followed by ‘B’ and ‘C items.’

Counting by volume involves counting inventory that sees the highest sales more often than inventory that isn’t as popular. Counting a control group involves selecting a group of stock-keeping units (SKUs) and only counting them multiple times over a short period. Random sampling involves a random group of SKUs that are rotated every cycle count, while event-based counting involves all inventory under a SKU once it hits a particular milestone, like every ten orders.

With the right approach, and the right software, retailers can manage both their online and physical retail space’s inventory from the same platform; stock levels are automatically adjusted as soon as a cashier scans a product or an online order is made. Performing timely, accurate and effective inventory counts are essential for proactively addressing the cause of shrinkage and by doing so regularly, your business can optimise loss prevention while maintaining enough stock to meet consumer demand.

Simon Le Grand is senior director of marketing at Lightspeed.