Most businesses that hold stock do some kind of physical count. Far fewer get anything useful from it. The count is done, a variance figure is calculated, the books are adjusted to match, and the same variance appears again at the next count.
A stock audit is only worth the effort if it ends in decisions: a process that changes, a person who is accountable, an item that is controlled more tightly. This article explains how to plan a count, how to read the variance properly, and what to do with the results, with a worked example from a wholesale electrical distributor.
Why most stock counts do not change anything
The typical pattern looks like this:
- The count happens once a year, usually just before closing the books.
- Receipts and dispatches continue during the count, so the numbers are unreliable from the start.
- Variances are adjusted in bulk without anyone finding out why they happened.
- Only the net variance is reported, so a large loss in one item is hidden by a gain in another.
The result is a number that satisfies the auditor but tells management nothing.
Plan the count before the day
A good count is decided by the preparation.
- Fix the cut-off. Choose a date and time. Every receipt and dispatch before it must be entered in the system. Nothing moves physically during the count, or movements are recorded separately.
- Freeze the book stock. Take a snapshot of system quantities at the cut-off, but do not show it to the counting team.
- Count blind. Counters record what they see, not whether it matches the system. A count sheet that shows the expected quantity invites "adjusting" the count.
- Map the locations. Every rack, bin and godown has a code, and every location is assigned to a counting team.
- Use two-person teams. One counts, one records, and teams do not count areas they manage day to day.
- Recount before you conclude. Any item with a significant variance is recounted by a different team before it is reported.
Read the variance properly
Once the count is complete, compare physical and book stock item by item. Then look at three things.
- Gross variance, not just net. Add up the absolute value of every shortage and excess. This is the true measure of how accurate your stock records are.
- Value and percentage together. A 20-unit shortage in a ₹25 item and a 20-unit shortage in a ₹1,450 item are very different problems.
- A materiality threshold. Decide in advance which variances must be investigated, for example any item with a variance above ₹1,000 or above 2% of the quantity.
A worked example
A wholesale electrical distributor counts 1,200 items. Here are five of them:
| Item | Book qty | Counted qty | Difference | Rate (₹) | Variance value (₹) |
|---|---|---|---|---|---|
| LED bulb 9W | 540 | 512 | −28 | 85 | −2,380 |
| Ceiling fan 1200 mm | 64 | 63 | −1 | 1,950 | −1,950 |
| MCB 32A | 310 | 330 | +20 | 140 | +2,800 |
| Wire 1.5 sq mm (coil) | 120 | 108 | −12 | 1,450 | −17,400 |
| Switch plate | 900 | 896 | −4 | 25 | −100 |
- Net variance: −₹19,030
- Gross variance: ₹24,630
The net figure understates the problem, because the MCB excess offsets part of the shortages. Applying the ₹1,000 threshold, four items need investigation. The switch plates can be adjusted without further work.
The investigation finds:
- MCB 32A (+20): a supplier receipt was stocked but never entered. This is a recording error. The fix is a rule that nothing goes on the rack without a goods receipt entry.
- LED bulbs (−28): most of the shortage matches free replacements given to customers under warranty, which were never recorded. This is a process gap. The fix is a simple replacement entry.
- Ceiling fan (−1): a display unit taken to a customer site. This is a timing difference. The unit is traced and returned.
- Wire coils (−12): no receipt error, no pending dispatch, no explanation. This is a genuine loss, and at ₹17,400 it is the most important finding. The fix is to move wire coils to a locked area with issue slips, and count them every week.
Classify every variance
Each investigated variance should end up in one of four categories. Each category has a different fix:
| Category | Typical cause | Fix |
|---|---|---|
| Recording error | Receipt or dispatch not entered, wrong item code | Tighten entry rules at receiving and dispatch |
| Timing difference | Goods in transit, pending invoice, stock at a customer site | Adjust cut-off procedures |
| Process gap | Samples, replacements, breakage not recorded | Create a simple entry for each case |
| Genuine loss | Theft, pilferage, undetected damage | Restrict access, count more often, fix accountability |
If most of your variance is recording errors, the problem is at the desk, not in the godown.
Stock audit checklist
Before the count
- Cut-off date and time announced to all teams
- All receipts and dispatches up to the cut-off entered
- Book stock snapshot taken and kept away from the counting teams
- Locations mapped and assigned to two-person teams
- Blind count sheets or a counting app prepared
During the count
- No stock movement, or movements logged separately
- Damaged and expired stock counted and tagged separately
- Each location marked as counted when complete
After the count
- Physical and book stock compared item by item
- Gross and net variance calculated
- Items above the threshold recounted by a different team
- Each variance classified into one of the four categories
- Corrective action agreed for each category, with an owner and a date
- Book stock adjusted only after investigation, with approval
Count little and often
A full annual count is useful, but it is a snapshot. Cycle counting works better for most businesses: count high-value and fast-moving items every week or month, and the rest once a quarter. Variances are found while the cause is still fresh, and the annual count becomes a formality.
Where a tool helps
Blind counts, recounts, variance calculations and classification are all possible on paper and Excel, but they are slow and error-prone across hundreds of items. TAudit was built to make this a controlled process: counting with barcode support, automatic comparison with book stock, variance reports by item and location, and an audit trail of who counted what and when.
