Cycle Counting Can Improve Your Bottom Line

Many companies that employ cycle counting have had success in maintaining an error-free inventory throughout the year. An accurate inventory is necessary for maintaining customer satisfaction as well as a company’s bottom line. An effective means to attaining this accuracy is cycle counting. However, some companies have tried cycle counting only to find it has taken more time and energy than they have to spare because it was not implemented properly. The following discussion highlights the advantages of cycle counting and when it should be applied.

Advantages of cycle counting

Cycle counting can help provide error free records. Greater customer satisfaction is often an important result from having accurate records as fewer out-of-stocks will occur. These accurate records will help prevent someone quoting a customer for an item in stock when it really isn’t. Additionally, cycle counting provides for greater inventory awareness. This awareness will help determine which inventory is providing value and allow for disposing of slow-moving and obsolete inventory. You must understand what cycle counting is and what it can achieve before it can provide this value.

The definition of cycle counting is to count a small percentage of pre-selected inventory on a regular basis. A regular basis can be every day or every week depending on the quantity and value of inventory and also the labor resources. The following is a summary of the steps that need to be taken in order for the desired results to be achieved:

1. Keep the system up to date so the cycle count is accurate.
2. Ensure inventory records have a high level of accuracy.
3. Determine the reasons for errors.
4. Correct the situation causing these errors.

Cycle counting approach

The first step is to separate inventory into categories. The best method for your company will depend on the quantity and type of inventory you have. When inventory is categorized this will determine how often to count each item. A logical approach is to count your higher valued inventory more often because these items will have a bigger effect on the bottom line.

Personnel commitment

The number of items to be counted, count frequency, size of storage area, inventory accessibility, and the physical characteristics of the inventory will determine the personnel needed to perform the cycle counts. Additionally, the company’s current labor resources have an obvious affect on how many people are available to cycle count.

One of the advantages to performing cycle counts is that employees have the opportunity to develop into specialists who are efficient and effective in achieving quality counts and reconciling differences. These employees can be excellent resources for finding solutions to inventory errors. When a company performs only an annual physical inventory, most employees that are assisting with the count are unfamiliar with the items being counted and methods of counting. Often in this situation, as many errors can be introduced into the system as are corrected.

Timing of cycle counts and establishing a cut-off

To achieve the best results, cycle counting should be done when all productivity has stopped. Having someone count after operational hours allows for the possibility of a proper cut-off which ensures that the goods on the shelf are available for sale and are also in the system. For companies that have a 24-hour production period this is not an option. This doesn’t make cycle counting impossible, just a little more difficult.
An important rule to follow to have an accurate cut-off is to fill all orders that are invoiced in the system. If an order is invoiced in the system but not filled that same day, there will be more inventory on the shelf than what is in the system. The reverse situation can also arise when receiving inventory. To avoid these errors, develop standards so that the inventory records are as up to date as possible for sales and receipts that occur each day. Having these standards helps alleviate differences and can help ease the reconciliation process.

Reconciling the count

It is very important to keep up with the documentation and paperwork associated with cycle counting. Errors can be found and corrected as the counts are completed and reconciled. Accuracy will not be achieved if these corrections are not made in the system and why the differences occurred are not resolved. Misapplied controls and procedures are often the cause of inventory errors. Cycle counting is not just a way to adjust inventory to the correctly stated amounts, but it is also a method to solve problems and maintain an efficient inventory. Solving the problems that are found may be just a simple training issue or it may indicate a need to revamp a company’s inventory control procedures. Inventory accuracy of 95% or better can be achieved as errors are identified and eliminated. By performing cycle counts, the need for an annual physical inventory could be eliminated!

Sound like a lot of work?

Just as with any other inventory counting method, cycle counting still involves the procedure of counting inventory and it takes time to become efficient in this process. However, cycle counting breaks it down to a much smaller scale allowing someone to focus and correct any inventory issues. Some questions to consider if you are thinking of utilizing cycle counting are: How important is the inventory asset to your company? What problems have you had with inventory control? What was your company’s inventory shrink write-off last year? If you answered “very important,” “many,” and “too much” to the three preceding questions, it may be time to investigate cycle counting.

Jennifer Raybon, CPA
Inventory Group Leader