Seradex White Paper
A Discussion of Issues in the Manufacturing OrderStream
Physical Inventory – ERP Best Practices
GAAP and Inventory
GAAP does require at annual physicalcount. Often cycle counting is acceptedby outside auditors but an annualphysical count is still the most commonscenario.While GAAP is not overly prescriptive onthe methods of conducting a physicalinventory this paper will outline generalprocedures which have been acceptedby many outside auditors. You canmodify the procedure to suit yourparticular requirements
Why Is a Physical InventoryNecessary?
If the people counting don’t realize theimportance of accurate stock balancesto them, your chances for obtainingerrorless counts are slim. So it is criticalto explain to everyone who willparticipate, why a physical inventory isnecessary.
Accurate Physical Counts = BetterCustomer Service
Everyone in your organization mustrealize that the primary purpose of aphysical inventory is not to please youraccountant or the tax authorities. It isto verify that the on-hand quantity of each item in your computer reflectswhat is actually on the shelf. Customerservice personnel need to be able totrust the accuracy of the stockquantities in your computer.
Accurate Physical Counts AreNecessary for EffectiveReplenishment
Most computer systems produce veryimpressive buying reports. Thesereports show you how much of eachitem the computer thinks is in eachwarehouse, how much will be demandedby customers in the near future, andhow much should be ordered from avendor or central warehouse. Whathappens if the quantities in thecomputer are wrong? Disaster! Nomatter how sophisticated the software,the wrong quantities, of the wrongproducts, will be ordered.
The Key to a Good PhysicalInventory Is Planning
A physical inventory is a very expensiveprocess. It usually involves aconsiderable labor expense and lostproduction time. If the resulting countisn’t accurate, the money spent on thephysical is wasted.What can you do to ensure that yourphysical inventory is successful? Set thecount date. Do this as early as possibleso that everyone has plenty of notice.Avoid dates when people arepreoccupied and may not be focused onthe task at hand.
The key to a successful inventory is thequality of the planning effort. Yourplanning should include when and whowill conduct the inventory and how thecounts will be taken. The completeprocess should be documented forfuture inventories. Provide instructions