How do you make a quality inventory?

All our tips on inventory management: Inventory is a complex and, above all, laborious operation! Here's a summary of best practices for carrying out your annual inventory in the best possible conditions.

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

French legislation obliges companies to carry out a systematic inventory at the end of each financial year, but beyond this legal aspect, it is also an act of corporate reorganization. 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's possible to sell under the right conditions.

Out-of-stock situations can damage your image, and overstock your finances.

Legal aspects

The balance sheet is a compulsory accounting document in France. It establishes a company's state of health 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 shortfalls 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 acting as 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.
Annual accounts must be drawn up at the end of the financial year, based on the accounting records and the inventory. These financial statements comprise a balance sheet, an income statement and notes to the financial statements, which form an indivisible whole."

Practical aspects

From a legal point of view, stocktaking is rather permissive. All that the article of law specifies is that it is obligatory for each commercial entity to carry out an inventory at least once a year. However, stocktaking in its global sense encompasses two concepts defined in the French Labor Code, namely accounting for the existence and value of inventory items.

Counting methods

• Complete inventory

Complete stocktaking is the practice of carrying out an inventory in one go, almost inevitably resulting in periods of stock unavailability for the company. This method of stocktaking is therefore most suited to small and medium-sized organizations.

• 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 type of stocktaking is recommended for companies that can't afford to be completely unavailable, such as mass retailers. This method is more time-consuming to manage, as the inventory task has to be carried out step by step, over the course of the fiscal year.However, it allows you 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 also 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", since it uses an averaging formula for inventory value.This means that, regardless of the economic context, the representation of a stock comprising items of the same type but with different prices is smoothed out.

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

• Accounting method: FIFO / LIFO

These methods apply different valuations to different products, as the same product may have several purchase prices in the inventory, making sales management complex. Significant discrepancies can also occur, making the inventory value calculation inaccurate. These methods are therefore obsolete.

• Last purchase price

This valuation method prioritizes the removal of last-purchased items from inventory. 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 price of the product as currently defined on the market. This method can be chosen arbitrarily, however, 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 is designed to make stock valuation more personal, by making it possible to record any deterioration or loss of stock, which inevitably reduces its value.

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

Inventory equipment

Computer applications can greatly facilitate the inventory process.

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

Improvements can also be made to the showerhead system. The inventory technician will no longer have to compare items one by one, but will be able to scan all items sequentially, and then place the handheld scanner on a stand that can be used to read the barcodes.This will transfer the data to a unit which will check for any discrepancies with the application's virtual stock.

In addition, to overcome the problem of unavailability of stock during the inventory procedure, it is possible on a handheld scanner equipped with a memory, to store the date and time of the scan of an item in the physical stock. In this way, when the final comparison is made between the stock contained in the handheld scanner and that in the application database, it will be possible to highlight stock reductions due to shortages in physical stock, or shortages due simply to sales during the inventory procedure, by extracting the time of sale and the time of scanning the item into stock.