Inventory Reconciliation: What you need to know

This guest post was brought to you by Stitch Labs, an online application for simple inventory management, order fulfillment, invoicing, expense reporting and business analytics.

At any given time, the number of units you have on paper and the number of units that are actually in your inventory can be two different things. Even the most fastidious record keepers can miss updating an item after hundreds of transactions. Inventory reconciliation helps curb such errors by checking your books against a physical inventory count.

Why is inventory reconciliation important?

Before we talk about how to reconcile inventory, let’s look at the reasons why.

●     Decision making. Accurate information about your inventory helps you make informed decisions as they arise. Real numbers matter when committing to wholesale orders or deciding when to submit your next order to a vendor.

●     Taxes. In most cases an annual count of physical inventory is required for tax purposes. Also, recorded losses can lessen your tax burden. So, the benefits can be measured in real dollars.

●     Shrinkage. Inventory reconciliation helps you identify any problems with shrinkage. There are numerous ways units can leave your inventory without being recorded as a sale, but typical causes include theft, loss, and damage.

●     Record keeping flaws. Mismatches in records aren’t always due to nefarious causes, like theft. Instead, this may be due to flaws in your record keeping process. Inventory reconciliation will help you identify problems such as forgetting to update an online storefront after making a sale.

How often should you perform inventory reconciliation?

There are several common approaches to choosing when to complete a physical inventory. The best fit for you will depend on your business and the nature of your inventory.

Annually: This could be considered the least effort required approach. For the sake of taxes, you’ll need to do a physical count of your inventory at least once per year. This does come with potential benefits as any loss recorded in your inventory can lessen your tax burden.

Seasonally/Periodically: Physical inventory counts provide useful information about your stock and this information come in handy more than once per year.

This is especially true for seasonal inventory and inventory that has a limited shelf life. Fashion retailers may do inventory counts at the close of a season, while retailers who sell perishable goods may set periodic counts to account for spoilage.

Perpetually: Improvements in software and technology have made it possible to keep extremely accurate inventory totals at all times. Inventory management software is able to make instant updates to inventory totals the moment an item is purchased.

The benefit of choosing a perpetual inventory approach is that you can make more informed business decisions with accurate inventory data in the moment. Physical counts to reconcile records are still necessary, but these tend to happen through a system called cycle counting where only portions of the inventory are counted at a given time instead of stopping the whole operation and counting everything.

What’s the best way to perform inventory reconciliation?

Annual inventory counts can require a business to stop everything for a short time, but perpetual inventory methods can be performed with less disruption thanks to inventory management software.

Good inventory software integrates with multiple sales channels and will make updates to your inventory records at the time a product sells. This saves the extra step of updating inventory records manually and lessens the risk of human error in the process.

If I can take a moment to toot Stitch’s own horn as an example, integrating Stitch with the mobile payment app Sail removes the need to manually update your inventory after a trade fair. Every payment made through Sail will automatically update inventory records in Stitch, which can in turn update your inventory available on Amazon, Shopify or Etsy.

Inventory management software can also aid in the physical count by offering printable line sheets to check off as you move around your storefront or warehouse. This added convenience removes friction from the process, making it easier to perform inventory reconciliation as a regular practice.

Some counting may need to be done outside of your own storage or warehouse. For example, if another retailer hosts some of your inventory as consignment, you’ll need to count this as well. The best approach here is to set up regular check-ins to update on new sales or items that may have been lost due to shrinkage problems. Consistency is key here. A retailer who knows that you’ll be calling every Friday each week or on the first of every month is more likely to be ready with accurate numbers for your records.


Inventory reconciliation is the practice of making sure the inventory you have recorded in your books matches what you actually have in stock. The reconciliation process is necessary for accounting and taxes, but is also useful in identifying problems you have with loss or flaws you have in record keeping.

Physical inventory counts need to be done at least annually, but more frequent checks can be good practice. Investment in great inventory management software, such as Stitch Labs, is a great aid to the reconciliation process, ensuring more accurate numbers along the way and greater ease in performing physical counts.

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