How to control your company’s inventory: a practical guide
The methods that keep inventory accurate: record every movement, count in cycles, prioritize with ABC analysis and know exactly when to reorder.
What does inventory control actually mean?
Inventory control means knowing, at any moment, how much of each item you have, where it is and why it changed. A year-end count isn’t enough: control comes from recording every movement and checking that your records match what’s on the shelf.
In Mexico, it’s also a tax requirement. Article 76, section XIV of the Income Tax Law (LISR) requires legal entities (personas morales) to keep inventory records of merchandise, raw materials, work in process and finished goods “under the perpetual inventory system.” Check with your accountant how it applies to you, or what your local rules require if you operate elsewhere.
Perpetual or periodic inventory: which one fits?
If your company buys, produces or sells every day, perpetual. A perpetual system updates the inventory record every time a purchase or sale occurs, while a periodic system updates it at scheduled times, at the end of a cycle, based on a physical count.
| Factor | Perpetual | Periodic |
|---|---|---|
| When it updates | With every receipt and issue | At period end, after a count |
| What you know between counts | Current stock for every item | Only what you had at the last count |
| Daily effort | Recording each movement | Low; the work is concentrated in the count |
| Who it suits | Companies with daily movements, several warehouses or raw materials | Very small operations with few products |
How should you record receipts and issues so they’re traceable?
Every movement should leave a trail: if material goes missing tomorrow, you need to be able to say who moved it, when and why. A good record includes:
- A sequential reference number (in Mexico, the folio) that is never reused or deleted.
- Date and time of the movement.
- Item, identified by a unique catalog code rather than names everyone spells differently.
- Quantity and unit: pieces, kilos, rolls or boxes, always the same unit for each item.
- Warehouse or location, both origin and destination.
- Person responsible: who handed it over and who received it.
- Reason and source document: purchase, sale, production order, scrap, return or adjustment. An adjustment is a movement too, never an overwritten number.
An inventory management manual from Management Sciences for Health (MSH) lists typical reasons records stop matching reality: duplicate entries, similar items getting mixed up, damaged stock thrown out without being written off and counts that are never reconciled.
How often should you count? Cycle counting vs. an annual count
In small batches, all year long. Instead of shutting the warehouse once a year to count everything, cycle counting splits inventory into groups and counts one group each week or month, reconciling differences as you go, so every item still gets counted at least once a year.
The MSH manual considers it better than an annual count for two reasons: an annual count shuts down operations for anywhere from a day or two to a week or more, and when a discrepancy turns up, it’s very hard to trace when during the year it started, something frequent counts make possible.
The same manual suggests counting your most valuable items more often (for example, A items three or four times a year, B items twice and C items once) and having someone other than the counter reconcile the differences.
What is ABC analysis and how do you use it?
ABC analysis ranks your items by how much money they move over a period, usually a year, so you put the most control where it matters most. Typical ranges, per the MSH manual (yours may differ):
| Class | Share of items | Share of consumption value | How to control it |
|---|---|---|---|
| A | 10–20% | 75–80% | Frequent counts and regularly reviewed reorder points |
| B | 10–20% | 15–20% | Standard controls and periodic counts |
| C | 60–80% | 5–10% | Simple controls; ask whether you need them always in stock |
To build it:
- Multiply each item’s annual usage by its unit cost.
- Sort the list from highest to lowest value.
- Calculate the cumulative percentage: the first items, which account for most of the value, are your A class; the next ones are B, and the rest are C.
FIFO, average cost or specific identification?
These are two separate decisions that often get mixed up: the order in which you physically use stock, and how you assign its cost in your books.
Physically, using what came in first helps keep material from expiring at the back of the warehouse. For accounting, Mexico’s inventory standard, NIF C-4 from CINIF, allows only three cost formulas: specific identification, average cost and first in, first out (FIFO, or PEPS in Spanish). Last in, first out (LIFO, or UEPS) has been off the table since NIF C-4 took effect in 2011. The standard also notes that physical handling doesn’t have to match the cost formula.
| Formula | How it works | When it’s used |
|---|---|---|
| FIFO (PEPS) | Goods sold carry the cost of the oldest stock; what remains keeps the most recent costs | Interchangeable items; requires tracking inventory layers by purchase or production date |
| Average cost | Each unit takes the average cost of similar units | Interchangeable items; the average is updated with each receipt or by period |
| Specific identification | Each unit keeps its own individual cost | Items that aren’t interchangeable or are set aside for a specific project |
For Mexican tax purposes, Article 41 of the Income Tax Law allows FIFO, specific identification, average cost and the retail method, and once you choose a method you must keep it for at least five tax years. Decide with your accountant; for operations, what matters is that your records keep the date and cost of every receipt, because every formula depends on them.
When should you reorder? Reorder point and safety stock
When stock hits the reorder point, the level that triggers a new order. The standard formula in the MSH manual is:
For example, if you use 40 rolls a week, your supplier takes 2 weeks to deliver and you keep 30 rolls as safety stock, your reorder point is 40 × 2 + 30 = 110 rolls. When you hit 110, you order.
Safety stock covers what you can’t predict: weeks of higher usage or a late supplier. If your usage and lead times are stable, it can be small; if they swing a lot, you need more. Review them regularly, especially for your A items.
When should you move from Excel to an inventory system?
Everything above can be done on paper or in Excel while one person records movements and you have a handful of products. It’s time for a system when:
- Several people record movements and the file falls behind.
- You have more than one warehouse or location.
- Physical counts rarely match and you can’t trace why.
- You find out something ran out when you already need it.
- Production consumes raw materials and nobody deducts them in time.
An inventory system records every movement with a reference number and an owner, alerts you when an item reaches its reorder point and deducts materials with every sale or production order. In Polymer, the system we built for Sumiplas, raw materials, consumables and finished goods show real-time stock, connected to production orders. Not sure it’s time yet? Check the signs your business has outgrown Excel.
If your inventory doesn’t add up or you keep running out without warning, let’s talk. In a free consultation we look at how your materials move and what to fix first. See our inventory management system and production control software services, or book your consultation. Pricing depends on scope, and we send it to you in writing after the consultation.
Frequently asked questions
For a business with daily movements, a perpetual system with cycle counting: you record every movement and count in small batches, starting with your highest-value items. If your company is a persona moral in Mexico, the Income Tax Law also requires it.
With cycle counting you count one group of items each week or month, so everything gets counted at least once a year. For example: A items three or four times a year, B items twice and C items once.
Not in financial statements prepared under Mexican standards: since 2011, NIF C-4 allows only specific identification, average cost and FIFO. For tax purposes, the Income Tax Law allows FIFO, specific identification, average cost and the retail method. Check with your accountant which applies to you.
Sources
- Ley del Impuesto sobre la Renta (Income Tax Law), articles 41 and 76Mexico’s Chamber of Deputies
- NIF C-4, InventariosCINIF (copy hosted by UNAM’s School of Accounting and Administration)
- MDS-3, Chapter 23: Inventory managementManagement Sciences for Health
- Principles of Accounting, Volume 1, 6.2: Compare and Contrast Perpetual versus Periodic Inventory SystemsOpenStax, Rice University
Last updated:
