Day 2 : The Importance of a Physical Inventory Count Before Year-End
For businesses that carry inventory, conducting a physical count before year-end isn't just good practice—it's essential for accurate financial reporting and tax compliance.
Why Physical Inventory Counts Matter
Your computer system might show you have 500 widgets, but do you actually have 500 widgets? Discrepancies between your books and physical inventory can result from:
Theft or shrinkage
Damaged goods not properly recorded
Clerical errors in receiving or shipping
Obsolete inventory that should be written off
The Financial Impact
Inventory errors directly affect your:
Cost of Goods Sold (COGS): Overstated inventory leads to understated COGS and inflated profits
Tax Liability: Incorrect inventory values can result in overpaying or underpaying taxes
Cash Flow Planning: You need accurate data to make purchasing decisions
Financial Statement Accuracy: Banks and investors rely on these numbers
Best Practices for Physical Counts
Schedule Strategically: Plan your count when inventory levels are typically lowest to minimize disruption.
Prepare Your Team: Train counters on proper procedures and provide clear instructions.
Use Technology: Consider barcode scanners or counting apps to improve accuracy.
Implement Controls: Use two-person teams and have different people count the same areas.
Investigate Variances: Don't just adjust—understand why discrepancies occurred.
Making Adjustments
Once you've completed your count, work with your accountant to:
Record necessary adjustments
Identify patterns in shrinkage or obsolescence
Implement better controls for the coming year
Consider the tax implications of any write-offs
Beyond Compliance
A physical inventory count isn't just about meeting requirements—it's valuable business intelligence that can help you optimize operations and improve profitability.
Start planning your year-end count now to ensure accurate financial reporting and set your business up for success in 2026.