The investment a company makes in inventory is usually one of its largest investments. Inventory is generally associated with the products a company has in stock and for sale, but it can entail much more, such as raw materials and the machinery used in production.

If a company is production-heavy, keeping accurate track of raw materials is essential to make sure the production process is not halted due to a lack of materials.

Because inventory is so important to a company's production process and usually amon its biggest asset, it is essential that these items are kept free from theft and mismanagement. To help with this, companies implement internal inventory controls.

There are many internal inventory controls a company can implement. It is usually in a company's best interest to have multiple controls in place.

Physical and Authorization Controls

The most fundamental – and probably most important – inventory control a company can have is physical barriers around facilities where inventory is stored. The outside of the facilities should have physical obstructions like gates, fences or barriers.

In addition to the physical barriers, they should have an identification checkpoint that ensures only authorized personnel is let into the location. This could be in the form of a badge-scanning system that will only unlock doors if authorized or a security guard that physically checks credentials.

Inventory controls should also be taken into consideration when infrastructure and logistic operations are being planned. Areas where the public can access should not be in the same locations as warehouses and areas with a large amount of inventory.

For example, shoe stores like Finish Line and Foot Locker only keep display shoes in their public access area; it is only when a customer wants to try on or purchase a shoe that the worker goes into the area where the inventory is stored.

Even retail stores that have products out in the open for customers to peruse keep the bulk of inventory in storage areas where the public do not have access.

Along with the preventative physical controls, risk assessments should be performed at facilities that store inventory. A company should be confident that their facilities can remain as intact as possible in the event of natural disasters like floods, fires, earthquakes and high winds.

If inventory storage facilities are left vulnerable, the company runs the risk of losing costly amounts of inventory if one of those events were to happen. In most cases, the bulk of these items will be covered by some type of insurance, but it is not guaranteed that everything will be.

Inventory Documentation Controls

At the most basic level, to maintain proper inventory control, a company must maintain proper documentation of what items it has and where they are located. One of the first steps in accomplishing this is organizing the inventory.

Every location where inventory is stored should be defined, and every item in that location should be identified and tracked by its location. Being able to track inventory by location makes it more manageable and easier to pinpoint the problem if issues arise.

As part of the inventory-management process, a system should be in place to document an item's trail from delivery all the way to use in production or shipment to a customer.

To begin, all arriving inventory should be counted and inspected to make sure the quantities and items ordered are correct and in good shape. If the quantity is incorrect, the invoice should be adjusted accordingly, so a business is not paying for items they did not receive. If items are damaged, they should be sent back and not paid for.

Having this initial verification control in place stops companies from overpaying or making production decisions based on items they did not receive.

Once deliveries are verified as correct, all inventory should be tagged or given identification that describes what it is and where it is to be stored. Having the location of an item marked can help set off red flags if the item is missing and has not been marked as sold.

When an item is removed from storage – either for use in production or for a sale – a company should have procedures in place for immediately recording these movements and transactions. If a piece of inventory is being removed from storage for a reason other than those two reasons, a company's protocol should call for the person removing it to sign off on it, so there is proper documentation of who is responsible for it.

Inventory Management Systems

A vital part of internal inventory control systems is the inventory-management system. An inventory-management system should consist of technology, employee processes and procedures that monitor and maintain inventory.

At a minimum, a complete inventory-management system should have inventory-management software, a documentation system and hardware that can process inventory.

Having inventory-management software is crucial because it gives a company a central database where it can access all inventory-related information. With this database in one place, businesses can analyze it more efficiently and generate reports that make it easier on employees.

Cloud software also makes it possible for employees to use the system from any device. Using a system that does not consist of inventory-management software is inefficient in today's world.

To complement the inventory-management software, a company needs to have a system in place for identifying inventory and documenting it. This could consist of barcodes or some other internal labeling system.

Hardware tools, such as items that can scan and read barcodes, will also be needed to translate activity to the company's inventory management software.

Segregation of Duties

One of the foundations of internal controls and risk management is the segregation of duties among employees. The idea behind segregation of duties is that employees should share responsibilities in a critical process, and one individual or department should not have sole control.

In general, companies should keep purchasing ability, inventory management and accounting responsibilities separate.

Those who are authorized to make purchases should focus on reviewing and approving purchase orders; those who have access to the warehouse and handle receiving and shipping should only do that; and those in accounting should focus on handling the company's financials.

Having an overlap of duties increases the chance for fraud and internal theft in the company. For example, imagine if the employees who receive and ship items could edit the accounting records; they could easily remove items and edit the books to reflect the change without setting off any red flags.

Reviewing Internal Controls

Companies should regularly audit and review their inventory-management process to ensure that it's working and the business is running efficiently. In addition to measuring the effectiveness of various systems, these reviews can help management perform age analysis of inventory and see which products may be causing unnecessary storage costs. Doing this lets the company know which items should be sold off at a discount or trashed entirely.