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Inventory Reconciliation: Why It Matters to Business

As a business owner, managing inventory is one of the most critical aspects of your operations. Mismanaged stock can lead to many issues such as lost sales, overstocked items, cash flow problems, and unhappy customers.


That’s why understanding and implementing inventory reconciliation is vital to keeping things on track—resolving the imbalances between your documented records and warehouse items.


At The Sourcing Co., we see firsthand how poor inventory management can cause burdens to you and your business. This article will guide you about the role of inventory reconciliation in your business, its different methods, and the benefits you can gain.

What is Inventory Reconciliation?

Inventory reconciliation is the process of ensuring that your digital inventory counts match your physical stock items. This allows you to identify discrepancies, whether they’re due to shrinkage, miscounts, or data entry errors. You need to address these inaccuracies to avoid product shortages or overstock of items, incorrect customer orders, and profit loss.

From supply chain and warehousing efficiency to financial health, the accuracy of your inventory impacts your business growth.

Methods of Inventory Reconciliation

There are several methods to approach inventory reconciliation, aligning with the nature of your business. Here are the techniques you can use.

1. ABC Method

This method is also called the Pareto Principle or 80/20 rule, where you categorize your inventory by how much each product contributes to your overall revenue. By this method, you can focus on the most important or best-selling items.

Below are the different types of ABC methods you can utilize.
  • A-grade inventory: These items make up about 80% of your revenue but are a smaller part of your total stock. Since they’re so valuable, you must regularly check and restock the items to avoid running out.
  • B-grade inventory: The products from B-grade inventory is around 15% of your revenue. You can count them every three to four months to keep things balanced.
  • C-grade inventory: Under this category are items that account for only 5% of your revenue. These products are usually low-cost and high-quantity. With this method, you can check your stock once or twice a year.

2. Seasonal Method

If your business is seasonal—for instance, selling holiday decorations during Christmas or swimwear during summer—you need to reconcile inventory based on peak periods rather than every month or quarterly.

3. Arbitrary Method

The arbitrary method works well for businesses with steady inventory throughout the year. By this method, you can reconcile your stock items based on what works best for your internal processes. These can be weekly, monthly, or quarterly monitoring.

Steps to Perform Inventory Reconciliation

Inventory reconciliation isn’t just a one-time task. To maintain accuracy, you need a structured approach. Here’s how to do it.

Step 1: Check Your Physical Inventory Count

Start with the basics—count your physical stock. Use a team of trained employees to manually count every item in your warehouse or storage area. This gives you a baseline of what’s on your shelves.

Step 2: Compare Physical Count with Inventory Records

Once you have your physical count, compare it with the inventory data in your software or system. Any differences should be highlighted immediately. This is where you start to see discrepancies.

Step 3: Look at the Last Inventory Deliveries or Shipments

Inventory doesn’t sit still, especially if you have frequent shipments. Cross-check your deliveries and shipments from your last reconciliation to ensure nothing was missed or miscounted in transit. This step is crucial for businesses like ours that deal with multiple suppliers, shipping and logistics.

Step 4: Examine Discrepancies

Now’s the time to investigate any discrepancies. Look for patterns—is it always the same item that’s off? If yes, change your process and notify your vendors. Resolving these issues immediately prevents disrupted supply chains and financial losses.

Step 5: Consistently Reconcile Your Inventory

Consistency is key. Whether you decide to reconcile weekly, monthly, or quarterly, make sure the process is already established in your operations. The more frequently you reconcile, the fewer data inconsistencies you’ll encounter.

Benefits of Regular Inventory Reconciliation

Here is why inventory reconciliation is pivotal in your business.

1. Improved Cash Flow

With accurate inventory counts, you’ll avoid over-ordering stock and tying up cash unnecessarily. This frees up funds for other business investments.

2. Increased Sales Opportunities

Knowing exactly what you have in stock helps you fulfill orders more accurately and faster. Fewer stockouts mean more happy customers and lasting client retention.

3. Better Supplier Relationships

Inventory reconciliation allows you to flag discrepancies and address them with suppliers before they become a major issue. This keeps your supply chain running smoothly.

4. Reduced Shrinkage

Inventory is an asset, so if you incorrectly count your inventory items, it can drop your financial statements. Inventory reconciliation ensures your accounting records are accurate, leading to better financial decisions on restocking, price changing, and selling items on sale.

5. Accurate Financial Reporting

Whether due to theft, damage, or clerical errors, shrinkage is a common issue for businesses. Inventory shrinkage occurs when the stock items are lower than those recorded on the inventory list. Regular inventory reconciliation helps catch shrinkage early and reduce its impact on your business.

Inventory Reconciliation Tips

1. Stay Organized

Organization is everything. Make sure your inventory storage is well-organized so that counts can be done seamlessly. Add labels on shelves, bins, and racks to avoid confusion during the counting process.

2. Pick the Right Counting Method for Your Business

Not every business has the same needs. Choose an effective method for your inventory. For example, if you deal with a lot of high-value items, the ABC method is the best choice. If you have seasonal sales cycles, use the seasonal method instead.

3. Use the Modern Technology

Manual counting can be time-consuming and error-prone. Utilize technology to streamline the process. Barcode scanners, RFID tags, and inventory management software can make reconciliation efficient. At The Sourcing Co., we use advanced tech solutions to keep our global inventory in check, which allows us to offer you faster service.

4. Count Inventory Often

The more often you count, the easier it becomes to spot imbalances. While daily counts might be overkill for small businesses, counting your high-turnover items more frequently can help you keep track of your supplies, sales, and customer demands.

5. Cross-Reference Reconciliations

If you notice consistent discrepancies, don’t just assume it’s a one-off issue. Investigate and cross-reference your reconciliations with other records—such as purchase orders and vendor deliveries—to solve the root cause of the problem.

The Bottom Line

At the end of the day, inventory reconciliation is a strategic tool that can impact the success of your business. By keeping your inventory accurate and addressing discrepancies early, you can improve cash flow, boost customer satisfaction, and build stronger supplier relationship management.

Here at The Sourcing Co., we understand the importance of systematic inventory management. Our global supply chain and proactive team handle all aspects of your product sourcing needs—from manufacturers to delivery—so you can focus on growing your business. Whether you need help with inventory reconciliation or sourcing products, we’re here to simplify your supplier management process and help you succeed. Contact us today to learn more.
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