How do I ensure a proper inventory cutoff?

The physical inventory counting process is highly dependent on a stationary inventory. This means that there can be no movement of inventory into or out of the warehouse area during the counting process, nor can there be a movement of any related paperwork.

If this basic rule is not followed, you will have great difficulty in determining the true value of the period-end inventory, because the quantities were in flux during the count. This section contains sample procedures that are applicable in most situations for ensuring a proper period-end cutoff of all inventory-related transfers. The procedures cover receiving, central stores, and the finished goods storage area. They are:

Receiving and receiving inspection

No paperwork or parts will be forwarded to the central stores area later than 11:00 A.M., October 26. This will allow paperwork to be processed and stock put away.

Beginning October 15, all receivers processed by receiving inspections must be stamped Before Inventory.

Central stores

Receipts. All paperwork on parts received from receiving inspection must be transferred to data processing before 4:30 P.M. Friday, October 26.

Issues. The paperwork on all issues to open orders and jobs in process must be completed and sent to data processing before 4:30 P.M., Friday, October 26. On issues for sales orders, the issue documents and parts must be in the staging area or shipping area before 3:30 P.M., Friday, October 26.

Finished goods area

Staging area. If parts are not shipped before 3:30 P.M., Friday, October 26, they will be retained as part of the storeroom inventory.

Receipts. Receipts into the finished goods area must be received and the paperwork sent to data processing before 4:30 P.M., Friday, October 26. The warehouse manager must ensure that all finished units are properly stored and that all related paperwork is sent to data processing before the 11:00 A.M. cutoff.

Issues. On issues for sales orders, the issue card and parts must be in the staging or shipping areas before 11:00 A.M., Friday, October 26. For issues to orders and job numbers, all paperwork on issues to work-in-process must be in data processing before 4:30 P.M., Friday, October 26.

The preceding procedures are intended for those companies using traditional paper-based transactions that are centrally recorded into the inventory database. If a more advanced system is in place where the materials management staff enters transactions directly into the inventory database either through local terminals in smaller batches or individually with radio frequency scanners, you can enter transactions until just a few moments before the beginning of the physical inventory count. Thus, advanced data entry systems allow a company to minimize the time period during which inventory cannot be moved during a physical inventory count.

Inventory Count Procedure

In a business that does not have accurate inventory records, it is necessary to periodically conduct a complete count of the inventory. This is usually done at the end of a month, quarter, or year, to coincide with the end of a reporting period.

As the following procedure will show, it takes a great deal of effort to complete an accurate physical inventory count, so companies to tend to limit the number of counts completed per year.

1. Order count tags. Order a sufficient number of two-part count tags for the amount of inventory expected to be counted. These tags should be sequentially numbered, so that they can be individually tracked as part of the counting process.

2. Preview inventory. Review the inventory several days in advance of the scheduled inventory count. If there are missing part numbers, or if items appear to be in a condition that would be difficult to count (such as not being bagged or boxed), notify the warehouse staff to make the necessary corrections. 3. Pre-count inventory. Go through the inventory several days in advance and count any items that can be placed in sealed containers. Seal them in the containers and mark the quantity on the sealing tape. This makes the counting task much easier during the actual count. If a seal is broken, then a counting team will know that they need to re-count the contents of a container. 4. Complete data entry. If there are any remaining data entry transactions to be completed, do so before the physical inventory count begins. This includes transactions for issuances from the warehouse, returns to the warehouse, and transfers between bin locations within the warehouse. 5. Notify outside storage locations. If the company has any outside storage facilities or thirdparty locations that hold company inventory on consignment, notify them that they should count their inventory on hand as of the official count date and forward this information to the warehouse manager. 6. Freeze warehouse activities. Stop all deliveries from the warehouse, and also segregate all newly-received goods where they will not be counted. Otherwise, the inventory records will be in a state of flux during the inventory count, and so will not be entirely reliable. 7. Instruct count teams. Assemble two-person teams to count the inventory, and instruct them in their counting duties. These duties involve having one person count inventory while the other person marks down the information on a count tag. One copy of the tag is affixed to the inventory, while the team retains the other copy. 8. Issue tags. An inventory clerk issues blocks of count tags to the count teams. Each team is responsible for returning a specific numeric range of count tags, whether or not the tags are used. Maintaining control over all count tags ensures that lost tags will be investigated promptly.

9. Assign count areas. Assign a specific range of bins to each count team. Note these locations with a highlighter on a map of the warehouse. The inventory clerk should maintain a master list of which areas of the warehouse have been counted, and which teams have been assigned to each area. 10. Count inventory. One person on each team counts a specific item within a bin location, and then the other person marks the bin location, item description, part number, quantity, and unit of measure on a count tag. The team affixes the original copy of the tag to the inventory item, and retains the copy. 11. Verify tags. Upon completion of a count area, each count team returns to the inventory clerk, who verifies that all tags were returned. If there are more warehouse areas to be counted, assign a new area to the count teams and issue them new blocks of count tags as necessary. 12. Enter tag information. Enter the information on the count tags into an online data entry form. Once data entry is completed, print a report showing all tag numbers entered, sorted by tag number, and look for any gaps in the numbers. Investigate any numbering gaps found. This will ensure that all count tags issued were included in the file. 13. Investigate unusual results. Re-sort the inventory report several ways to look for unusual information, and investigate the tag entry associated with each one.