How to Run a Physical Inventory Count

Execute an accurate physical inventory count to reconcile stock records and identify shrinkage, overages, and valuation errors.

  1. Set count date and freeze inventory movement. Pick a date when inventory levels are lowest — typically month-end or after peak selling periods. Stop all receiving, shipping, and production 24-48 hours before the count. Post signs blocking access to inventory areas. Any movement during the count creates reconciliation problems that cost more time than the inventory is worth.
  2. Organize count teams with segregated duties. Assign 2-person teams: one counter, one recorder. Never let the same person who manages daily inventory transactions count that same area — this defeats the control purpose. Plan 150-250 SKUs per team per day for detailed counts. Fast-moving or high-value items get your most experienced counters.
  3. Print count sheets and organize inventory areas. Generate count sheets from your inventory management system showing expected quantities by location. Physically organize inventory so counters can access everything — move pallets, clear aisles, group like items. Mark areas as counted with tape or tags to prevent double-counting. Damaged or obsolete inventory gets counted separately.
  4. Execute the count with spot-check controls. Count teams work systematically through assigned areas, recording actual quantities on count sheets. Supervisors randomly recount 10-15% of completed areas to verify accuracy. Any variance over 5% triggers a full recount of that section. Record serial numbers for high-value items where applicable.
  5. Reconcile variances and investigate discrepancies. Input actual counts into your system and generate variance reports. Investigate any SKU with variance over 2% of book value or $500, whichever is lower. Common causes: theft, receiving errors, production scrap not recorded, or location mix-ups. Document explanations for all material variances for audit purposes.
  6. Adjust inventory records and calculate financial impact. Post inventory adjustments to bring book quantities to actual counts. Calculate the dollar impact: positive variances increase inventory value, negative variances hit COGS immediately. Total shrinkage over 2% of inventory value suggests process control problems that need fixing before the next count cycle.