How do you carry out a quality inventory?

All our tips on inventory management: Taking stock is a complex and, above all, time-consuming operation! Here is a summary of best practice for carrying out your annual inventory in the best possible conditions.

Stocktaking is a compulsory act, but it's also valuable for companies from a practical point of view.

French law requires companies to carry out a systematic stocktaking at the end of each financial year, but beyond this legal aspect, it is also an act of corporate reorganisation. Stock is of considerable value to the company, so having an accurate view of it is important for knowing when to restock, and whether it is possible to sell under good conditions.

Out-of-stock items can damage your image, while overstock can damage your finances.

Legal aspects

The balance sheet is a compulsory accounting document in France. It establishes the state of health of the company at the end of its financial year. Carrying out a complete physical inventory is one of a company's obligations. It is used to establish the real value of the physical inventory, compensating for any shortcomings or errors, and to draw up the annual balance sheet.

Article L123-12 of the French Commercial Code (Source: Legifrance) :
"Any natural or legal person who is a trader [...] must check the existence and value of the assets and liabilities of the business by means of an inventory at least once every twelve months.
It must draw up annual accounts at the end of the financial year in the light of the accounting records and the inventory. These annual accounts comprise a balance sheet, profit and loss account and notes to the accounts, which form an indivisible whole.

Practical aspects

From a legal point of view, the drawing up of an inventory is rather permissive. All that the article of law specifies is that it is obligatory for each commercial entity to do so at least once a year. However, the inventory in its global sense covers two concepts defined in the Labour Code, namely accounting for the existence and value of stock items.

Counting methods

• Complete inventory

Full stocktaking is the practice of carrying out an inventory in one go, almost inevitably resulting in periods when the stock is unavailable to the company. This method of stocktaking is therefore most often suited to small or medium-sized organisations.

• Rotating inventory

Rotating inventory is the practice of carrying out a complete inventory in several stages, making only certain parts of the goods unavailable rather than all of them. This method of stocktaking is recommended for companies that cannot afford to be completely unavailable, such as supermarkets, etc. This method requires heavier management, as the inventory task has to be carried out bit by bit over the financial year.However, it allows us to approach this accounting obligation with greater peace of mind, which reduces the likelihood of errors.

Valuation methods

Inventory valuation methods provide an overall view of the value of your inventory, while taking into account specific factors. All methods are acceptable, although each is adapted to a specific business context.

• Accounting method: The weighted average cost method

This is the most commonly used method and also the most "neutral", as it uses an average calculation formula for the value of the inventory.Regardless of the economic context, the representation of a stock comprising items of the same type but with different prices is smoothed out.

Here is the formula for calculating the Weighted Average Cost:
Weighted Average Cost = Total quantities (Initial stock + additions) / Total values (after additions)

• Accounting method: FIFO / LIFO

These methods involve applying a different valuation to different products, as the same product may have several purchase prices in stock, which makes sales management complex. Significant discrepancies can also occur, making the stock value calculation inaccurate. These methods are therefore obsolete.

• Last purchase price

This valuation method prioritises the removal from inventory of items purchased last. This has the effect of reflecting the most recent market value for that product on the stock.

• Market price

The market price method of inventory valuation involves valuing inventory in relation to the current market price of the product. This method can be chosen arbitrarily, but it is more relevant to certain core businesses based on the sale of products whose price fluctuates enormously, such as oil or metals, for example.

• Personal appraisal

This method consists of making the valuation of stock more personal, by making it possible to record any deterioration or losses incurred on the stock, which inevitably reduce its value.

All valuation methods are correct as long as they reflect a fair and unbiased stock value.

Stocktaking equipment

Computer applications can greatly facilitate the stocktaking process.

For example, technicians who scan the physical stock using barcode scanners speed up the process and make it more reliable.

There are also improvements that can be made to the shower head system. The technician in charge of the inventory no longer has to compare the items one by one, but can scan all the items sequentially, then place the handheld scanner on a stand that can be used to read the barcodes.This will transfer the data to a unit that will check any potential differences with the application's virtual stock.

In addition, to overcome the problem of stock being unavailable during the inventory procedure, it is possible on a handheld scanner with a memory, to store the date and time of the scan of an item in the physical stock. In this way, during the final comparison between the stock contained in the handheld scanner and that in the application's database, it will be possible to highlight stock reductions due to shortfalls in physical stock or shortfalls due simply to sales during the inventory procedure, by extracting the time of the sales and the time of the scan of the item in stock.