A version of this article was originally published in October 2021.
In 2023, one UK grocery retailer claimed that shrinkage costs them as much as £100 million a year.
Shrinkage is when a business loses stock from everything other than sales, including the accidental or deliberate loss of stock due to theft or damage.
When selling physical products online or in a store, stocktaking can help protect your business from loss and is absolutely worth making time for. Aside from inventory management, stocktaking can also help you make informed decisions and predictions.
Let's take a further look at why stocktaking is important, the different methods you can use and how to do one effectively for your small business.
What is stocktaking?
Stocktaking — also known as inventory checking — is the process of physically checking the quantity and quality of sellable items in your stockroom or warehouse.
The process is simple: you count every piece of stock you have and note down the quantity. You can use pen and paper or a scanner that's connected to counting software.
Some people also take the opportunity during a stocktake to note the condition of items and determine if they're suitable for sale.
Why is a physical inventory important?
A physical inventory ultimately helps you to maximise sales and minimise losses.
Carrying out inventory checks is valuable to your business because they allow you to assess your stock levels and see:
- If there’s any missing, stolen, damaged or surplus stock
- If there are any discrepancies in your online stock compared to the physical stock — this is especially important for online retailers
- The cost of your stock, which is needed when you file your tax return
- What sells well, so you can buy or make more of it
- What isn’t selling, so you cut down or halt restocking
- How streamlined your forecasting and restocking system is
- If any perishable stock is due to go out of date
- If any deadstock could be sold at a discounted price or given away
So while your online inventory system should be able to catch most of these, a physical inventory eliminates any doubt.
Types of stock checking
There are five inventory methods that are all based on how often (or how little) you conduct a stocktake.
The five types of stocktaking are:
- Annual stocktaking — occurs once a year and all of the stock is recorded at once. This is the minimum frequency that businesses should consider to keep their records accurate.
- Periodic stocktaking — occurs monthly, every few months or twice a year. Similar to an annual stocktake, all the stock is counted in one sitting and is the most popular form of stocktaking.
- Continuous stocktaking — occurs numerous times throughout the year. This type of stocktake can involve different products being counted at varying times with certain products being counted once a week and others once a month. Continuous stocktaking makes end-of-year statement preparation easier since stock level information is always up-to-date.
- Spot checks — occur randomly and usually because you’ve noticed some discrepancies. Say you notice a difference in physical stock levels compared to that of your inventory software; you could carry out a spot check to discover the cause.
- Stockout validation — only occurs if a product is out of stock or very low. This method acts as more of a record of why and when a stockout occurred to help make sure it doesn’t happen again. If your chosen stocktaking software and physical method are accurate, you shouldn’t need to conduct a stockout validation.
The type of inventory you choose will depend on the kind of business you have.
For instance, if you’re a crafter and make the products that you sell yourself, your inventory will include raw materials, works in progress and finished items. All of this needs to be counted in the stocktake, meaning you may need to count raw materials more often to ensure you have what you need to fulfil orders.
Advantages and disadvantages of stocktaking
A key advantage of stocktaking is being able to see if you’re overstocking. These products are known as deadstock.
While an excess of stock may not sound so bad, revealing if and how you’re overstocking could help you save money.
Deadstock holds value that could be used elsewhere in the business. It also takes up space in storage, which equates to money that could be used for something else or even saved.
Some businesses also use a stocktake to do a big clean up of their workspace or warehouse. This can make finding and maintaining stock easier, giving you and your workers a better work environment.
Although it's a tedious task, a well-organised stocktake makes life easier for the business in the long run.
How to do a stocktake
Doing a stocktake is a big job — one that needs an airtight system and plenty of organisation.
Here are our top tips for doing a stocktake in the most efficient way.
1. Plan ahead
When are you going to do the stocktake? Stocktaking can take 1 – 2 days depending on how much stock you have, so it’s worth thinking about the best time to do it.
Your stocktake could be spread out over evenings or shutting up shop completely.
Be mindful that you may also need assistance, which could involve asking friends, family or staff for help and therefore booking their time.
Tip: avoid trading during your stocktake. Any sales made while you’re in the throes may mess with your numbers.
2. Define a process
Where are you going to start? What are you going to do with damaged goods? Deciding on these factors will help to determine a process.
You could pick a category and work your way through one by one, or use the wall-to-wall method and take stock of everything from one end of the room to the other.
However you decide to count your stock is up to you! Just make sure everyone involved is briefed beforehand and are using the same method.
3. Create a schedule
Think of the schedule as a plan of action. It should include blocks of time allocated to certain stock categories or areas of the stock room and when to take breaks.
A schedule can help you plan how much time is needed to complete the entire stocktake. That way you can let your customers know when you’ll be closed and keep you on track.
4. Consider using a stocktaking app
If you have a website that sells stock online, the website builder you use may already have a stock management feature, making stocktaking easy.
If you have a mix of physical and online stock, you may find a third-party stocktaking app to digitally record all of it at once would be better for you.
There are a few stocktaking apps on the market, here are some options:
- Zettle — primarily used as a point of sale, but has stock management capabilities
- Zoho — has a whole suite of cloud-based software, including inventory management
- Inventory Now — promises simple inventory tracking
- TidyStock — ideal for Xero users as you can link the two accounts
5. Print off stock sheets
Regardless of whether you use inventory software, barcodes on your products or a POS system, you should print out an inventory list to mark down the stock levels of each product against what you have on your system.
This system allows you to make notes and mark discrepancies against the software to double-check it’s not a system issue.
6. Organise the stockroom
It might seem strange to organise a stockroom before a stocktake, but making sure everything is where it’s supposed to be will allow you to count everything under one category in one go and reduce anomalies.
7. Be thorough
In other words, don’t guess! The whole point of a stocktake is to confirm the accuracy of your products, so make sure to count absolutely everything instead of estimating.
If a lot of your items are boxed and it’s easy to open them, take a peek inside to check if the barcode and description match the contents; not doing so could cause issues later down the line.
What do stocktaking and business insurance have in common?
No, this isn't the start of a bad joke.
Business insurance can cover your stock for things like theft, damage from a flood or a fire and business interruption due to unexpected problems in your supply chain — all things that would seriously affect the accuracy of your inventory management.
Our cover for shops and retail businesses can include stock cover as well as public liability, employers' liability (if you need it) and accident and sickness cover.
