Why count at all
Software tracks inventory by adding what you buy and subtracting what you sell. It does not see breakage, theft, miscounted deliveries or items given away. Over time the book quantity drifts from reality, and so does your profit.
A count at least once a year, and ideally more often for fast-moving or high-value items, resets the books to the truth and shows where leaks happen.
Preparing for a count
Pick a quiet time, such as after close. Pause receiving and shipping or record what moves during the count. Organize the stock, label areas and print a count sheet or use a scanning app. Assign each area to a person and have a second person verify high-value items.
Count in sections and mark finished areas so nothing is counted twice. Note damaged or expired goods separately.
Reconcile the count to the books
Compare counted quantities with the quantities in your system. Investigate large differences before posting adjustments. Look for unrecorded receipts, unprocessed returns, items recorded under the wrong product, or a unit-of-measure mixup such as cases versus single units.
Then post an inventory adjustment. The shortage reduces inventory and increases an expense, usually inventory shrinkage or cost of goods sold. A surplus does the opposite. Keep the signed count sheets.
Measuring shrinkage
Divide the value of shrinkage by the value of sales or average inventory to see a rate. A rising rate is a signal. Some loss is normal, especially with perishable or fragile goods, but you should know your own baseline and see if it moves.
If the same product keeps coming up short, look at how it is stored, who has access and whether it is easy to steal or to miscount.
Controls that reduce loss
Lock high-value stock, limit who can adjust inventory in the system, and match supplier deliveries to purchase orders as they arrive. Record damaged goods at the time rather than at count day. Rotate counts by product category through the year, so you catch issues before they grow.
Finally, remember tax. Inventory values affect cost of goods sold on your return, so give your tax preparer the count totals and method used.
A simple count-day script
On the day, hand each counter a sheet with item, location and a blank quantity, with the book quantity hidden so they count what they see rather than what they expect. Have a different person recount any line that differs from the book by more than a set tolerance. Collect all sheets before anyone leaves, and have the owner or manager sign the summary. This blind count approach catches far more errors than copying numbers from the system.
Worked example with numbers
Book inventory is $62,000, the count is $59,800, so shrinkage is $2,200, or 3.5% of book value. Sort by category to see where it concentrates. If one category is $1,800 of it, check receiving and theft controls there first.
Mistakes that cost money
Counting while sales continue. Letting the person who orders do the counting. Ignoring small differences.
Check your work
Recount the largest variances before adjusting.
Common questions
How often should I count?
At least yearly, with cycle counts for important items more frequently.
Is shrinkage tax deductible?
It flows through cost of goods sold or expense. Your tax preparer will confirm treatment.
What if the count is far off?
Pause and look for process errors before adjusting. Large gaps often come from receiving or unit mistakes, not theft.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
