What Is Inventory Accuracy?

Inventory accuracy refers to the degree of consistency and reliability of a company’s inventory records. It is a measure of how closely the recorded quantity of inventory matches the actual quantity of inventory on hand. High inventory accuracy means that a company’s records are accurate and up-to-date, and that the company has a good understanding of its stock levels, enabling it to make informed decisions about purchasing and production. Low inventory accuracy, on the other hand, can lead to stockouts, overstocking, and wasted resources.

Suggested article: How inventory accuracy can help the business benefit?

Why do you need an accurate inventory?

An accurate inventory is essential for a number of reasons. Here are a few key reasons why it’s important to maintain accurate inventory records:

  1. Business efficiency: Accurate inventory records allow companies to have a clear understanding of what products are in stock and what products need to be reordered. This can help reduce stockouts, overstocking and wasted resources, resulting in a more efficient and profitable business.
  2. Better customer service: Accurate inventory records allow companies to quickly and easily meet customer demand, which can help improve customer satisfaction and retention.
  3. Accurate financial reporting: Accurate inventory records are essential for accurate financial reporting. If a company’s inventory records are not accurate, it can lead to incorrect financial statements and even legal issues.
  4. Improved production planning: Accurate inventory records allow companies to plan production schedules more effectively, which can help reduce lead times and improve delivery times.
  5. Better forecasting and budgeting: Accurate inventory records allow companies to make more accurate forecasts and budgeting, which can help them identify trends and make better decisions.
  6. Compliance: Many companies are required to comply with regulations such as Sarbanes-Oxley Act and GAAP, which require accurate and timely inventory records.

How to measure inventory accuracy?

Here is the percent accuracy formula to calculate for your stock:

Inventory accuracy = (counted items / items on record) * 100

Start by counting the units of an SKU you have in stock. Then, divide that number by the figure recorded in your inventory management system of that same SKU, and multiply by 100.

For instance, you’ve counted 1,000 units in your warehouse. Your electronic records show you have 1,200. That means your stock accuracy rate is: (1000/1200) *100 = 83.33%.

Keep in mind that the formula is only correct if you have a reliable stock count. There are 2 methods for stock counting to give you inputs for calculation: a physical inventory count or inventory valuation.

Physical inventory counting

A physical inventory count refers to the manual counting of your stock. To avoid human errors, you should have 2 separate teams to count each SKU and compare their results. Divide your warehouse into designated zones. Each team will take turns counting the stock located in that zone only. If the 2 teams come up with the same number, record it. If not, do a recount until they meet a consensus.

Physical inventory counting works best for brands with fewer SKUs, since large volumes of inventory will take considerably longer to tally.

Inventory valuation

Another approach to measuring inventory accuracy is using inventory valuation. It is the monetary value of your unsold inventory at the time of reporting.

For this method, you take the value of your actual inventory. You can use barcode scanners to quickly add up the value of the available stock. Then, divide it by the inventory value displayed in your inventory management system, and you’ll have the same result.

Continue with the same example, if you count 1,000 units in a warehouse with $5 value for each, your total inventory is worth $5,000. Your inventory management system records 1,200 units, meaning $6,000 value. Taking the division, your inventory accuracy rate is (5,000/6,000) *100 = 83.33%.

The inventory valuation method is most useful for big businesses with large inventory volumes. As they cannot use manual counting which is less practical or time-consuming for huge warehouses.

Inventory accuracy best practices

Maintaining accurate inventory records is crucial for any business that wants to stay organized, meet customer demand, and improve overall efficiency. Here are some best practices for reducing errors and keeping accurate inventory records:

  • Implement a barcode or RFID system: Using barcodes or RFID tags allows for quick and accurate tracking of inventory, reducing the risk of errors caused by manual data entry.
  • Use inventory management software: Inventory management software allows you to track inventory levels in real-time, set reorder points, and generate reports. This can help reduce errors and ensure that you always have the right amount of stock on hand.
  • Conduct regular physical inventory counts: Regular physical inventory counts help ensure that your records are accurate and that there are no discrepancies between the physical stock and the recorded stock.
  • Train employees on proper inventory procedures: Proper training on how to handle, count, and record inventory can help reduce errors caused by human error.
  • Audit your inventory regularly: Auditing your inventory regularly can help identify any errors or discrepancies and ensure that your records are accurate.
  • Develop a process for handling discrepancies: Having a process in place for handling discrepancies when they are found can help ensure that errors are quickly and efficiently corrected.
  • Use proper labeling and organization: Proper labeling and organization of your inventory can help prevent errors caused by confusion or misplacement of items.
  • Monitor and review inventory reports regularly: Reviewing inventory reports regularly can help identify trends, patterns, and potential issues that may affect the accuracy of your records.

By following these best practices, you can significantly reduce the risk of errors in your inventory records and ensure that your business has accurate information to make informed decisions.

Summary: Final say

Having accurate stock is essential for an efficient inventory management process. It allows you to avoid stock shortages and overstocking, and decrease costs. By following the 5 best practices for inventory accuracy, you can improve your inventory management processes, leading to better demand forecasting and higher customer satisfaction. Accurate inventory is a key factor in making sound business decisions, and it helps in maintaining good customer relationships.