Preparing for a Year-End Inventory Count: A Guide for Manufacturers
For manufacturers, inventory is one of the most significant areas in financial reporting. Often representing a company’s largest balance sheet asset, inventory valuation directly influences gross margin, taxable income, and overall financial performance. A carefully planned and executed year-end inventory count not only ensures the accuracy of reported results, but it also provides management with meaningful insights into operational efficiency and working capital management. Let’s outline some best practices that manufacturers should plan to implement in advance of year-end.
Establishing Policies and Procedures
Preparation for a year-end inventory count begins with having policies in place. These policies should clearly define roles and responsibilities, cutoff procedures for shipping and receiving, and the methods used for counting throughout the year, whether through a full physical count, through cycle counts, or a combination of both. Just as importantly, manufacturers should ensure their chosen inventory valuation method (FIFO, LIFO, WAC, or standard costing) is applied consistently. Documented policies create a strong foundation that promotes consistency and a reliable framework for managing the inventory count process.
Pre-Count Readiness
Before the count, manufacturers should ensure the warehouse and production floor are organized. Inventory should be neatly arranged, labeled, and easily accessible. Damaged or obsolete items should be segregated and clearly identified as excluded from inventory, and, if practical, inventory movement should be suspended during the count. If freezing operations are not feasible, strong cutoff procedures are critical for a smooth count. For more in-depth explanations on cutoff, check out this article from our Nonprofit team.
Training the Count Teams
The training for those involved in inventory or cycle counts should address how to perform counts correctly, document discrepancies, and escalate unusual findings. In preparation, companies should conduct mock test counts that simulate the procedures that an external party, such as a bank or accounting firm, would perform during an actual count. Performing both sheet-to-floor (verifying system records against physical inventory) and floor-to-sheet (verifying physical inventory against accounting records) counts are great tools to use for preparation. These mock counts help identify gaps in procedures and provide employees with practical experience ahead of year-end.
Special Considerations for WIP
Work-in-process (WIP) presents unique challenges for manufacturers, particularly when operations continue during the year-end count. Unlike finished goods or raw materials, WIP is constantly moving through stages of production, making it difficult to capture an accurate snapshot at a single point in time. To address this unique challenge, management should identify WIP areas in advance, tag and segregate items clearly, and tailor cycle counts towards these higher-risk items.
Third-Party Involvement
At year-end, some manufacturers engage external parties, such as auditors or lenders, to observe the year-end inventory count, perform test counts, and review reconciliations. This process operates smoothly if the manufacturer prepares using several of the strategies noted previously. For companies not engaging an external party, it remains their responsibility to ensure that year-end inventory results are accurate and reliable without a third-party verification safety net.
Post-Count Reconciliation
After the completion of the count, management should promptly reconcile results to the company’s perpetual records and investigate any variances. Properly documented explanations not only support requirements for an auditor or a lender but also help identify potential weaknesses in inventory management and internal controls.
Final Thoughts
A year-end inventory count is more than a compliance task; it is a key responsibility that impacts financial accuracy and operational insight. By implementing clear policies, organizing inventory, training staff, conducting mock counts, and addressing high-risk items such as WIP, manufacturers can further ensure reliable and accurate results. Proper preparation strengthens internal controls, supports consistent reporting, and gives management confidence in the integrity of their financial statements.
Please reach out to a member of our Manufacturing & Distribution team for more information on preparing for year-end inventory counts. For additional resources, visit our Manufacturing & Distribution industry page.
About the Author
Tanner is an Assurance Supervisor, where he specializes in serving manufacturers and nonprofit organizations. He provides audit, assurance, and advisory services to a broad range of entities
In his role, Tanner manages day-to-day audit operations, mentors junior staff, and works closely with clients to ensure timely and accurate financial reporting. His technical knowledge includes Uniform Guidance audits and Generally Accepted Government Auditing Standards (GAGAS). Known for his thoroughness and collaborative leadership style, Tanner is dedicated to building strong client relationships and delivering high-quality service. He is actively involved in staff training and plays a key role in process improvement initiatives within the firm.
