Inventory Management: The Importance of Cycle Counts

For many small businesses, inventory represents a substantial part of the company’s assets and expenses. Some companies only conduct physical inventory counts at the end of their fiscal year, relying on their software to determine whether there is sufficient stock to fill current or expected orders. They may also rely on an inventory program to determine when it is time to manufacture or order additional products. Yearly inventories can bring surprises that can unfavorably impact the company’s annual statements. Although inventory is an important asset for large companies and major corporations, the smaller your company, the more you need an effective plan to manage and control your inventory. Conducting regular cycle counts can help you in a variety of ways. 

What Are Cycle Counts? 

 
Cycle counts let you target selected items for a physical inventory. Depending on the size and nature of your inventory, you could schedule a cycle count daily, weekly, monthly, or quarterly.  
 
You select the items to be counted, and they do not have to be the same on every cycle count. Most companies assign priorities to items to help determine which items should be included. 
 
1. Popular items with high turnover rates are generally assigned the top priority. These are items that could result in numerous unhappy customers if you do not have sufficient stock to cover their orders.  

 
2. High-value items are often assigned the next priority. These are items that could tempt internal or external thieves, have a significant financial impact if they become damaged or lost, or represent a substantial investment in a product on which important customers will expect prompt delivery when they place an order. 

 
3. At this level, you can include fragile items that could be easily damaged by warehouse or shipping personnel during their normal activities. This level could also include items with a finite shelf life. Although products having expiration dates may need to be included, most products will be those that have value only during a specific time. Calendars, holiday ornaments bearing the current year, shirts marking a specific festival or sporting event, and similar items that will begin to lose all or some of their value after a specific date has passed should be included in this category. 

 
4. The last category covers all items that were not included in another group. The products will be those that sell less frequently or that cost less than other items in your inventory.  
 
 

How to Conduct a Cycle Count 

 
A cycle count should follow the best practices for a physical inventory count. These are listed below, but you may need to adapt some of them to meet your specific needs. 
 
1. Choose the products to be counted. As a general rule, 60% should come from the first and second priority levels, 25% from the third level, and the remaining 15% from the fourth priority level. There may be some products that you want to include on every cycle count, but you should try to make sure that every product is included on at least two cycle counts each year. 

 
2. Select a day and time. Many companies close their shipping and receiving departments on weekends, so a Saturday may be the preferred day. Other companies have production and shipping departments operating every day, so they usually choose the slowest day and conduct counts at the start of the day. 

 
3. Assemble the supplies needed for the count. Depending on your method, this may include two-part inventory tickets, handheld scanners, clipboards, legal pads, pens, or printed lists of the product names to be counted. 

 
4. The products to be counted cannot be shipped or moved until the count is finalized. No additional stock should be added to the area under count during this time.  

 
5. Notify the employees who will be affected, including those who will conduct the count, those who will need to stage any items received or produced during the count, and employees who normally pick, pack, or ship items. 

 
6. Prior to beginning the count, make sure that all receivers and shipping documents have been processed. Make a note of the numbers representing the final receiving report, invoice, packing slip, or other documents that will impact your computerized inventory records. 

 
7. If necessary, rope off the area or post signs to prevent anyone from taking, moving, or adding products. 

 
8. Every product should be counted by two people or two teams. Do not supply your counters with the number of items shown in your book inventory, and do not let your counters work together.  

 
9. Assign your counters to specific areas. You can designate an entire area or a single shelf. Be sure and provide a list of the products that they are to count. Otherwise, they might fail to count an item or count products unnecessarily. 

 
10. Send a person or team to conduct the first count on each area. When they complete their assigned area, have them conduct a second count on a different area. 

 
11. Compare first and second counts. If there are discrepancies, you can have a third team or individual perform an additional count. You could also have a supervisor take both of the original counters along to determine the reason for the discrepancy and approve the correct number. 

 
12. Once there are no unresolved discrepancies, you can compare the count to your computerized inventory. Major discrepancies should be flagged for investigation. Otherwise, allow shipping, receiving, and production activities to resume. 
 
 

What Are the Advantages of Cycle Counts? 

 
Cycle counts help you manage your inventory levels, reduce the possibility of absorbing a large financial impact at the end of the year, and help you provide better service to your customers. 
 
1. If a customer is placing an online order and sees that a product is not currently available, he or she may choose to purchase it from someone else. If your employee is taking a phone order or responding to an inquiry, the result could be the same. Keeping your computerized inventory accurate can help avoid discrepancies between your book and physical inventories, reducing the possibility that product is shown as unavailable when you actually have it on your shelves. 

 
2. You can make better decisions on ordering products, and this results in better utilization of your available cash. Inaccuracies could lead you to believe that you are almost out of an item, causing you to reorder it prematurely. You might also believe that you have a sufficient stock to fill a large order from a valuable customer when you do not, leading to additional charges to have your supplier expedite your shipment.  

 
3. Inventory shrinkage is a common problem that is not always caused by shoplifters or dishonest employees. Items can be broken by careless employees, and boxes can be damaged by pests or frequent handling. Cycle counts let you spot problems early so that you can take the appropriate action.  

 
4. If you must write off inventory, you can take smaller hits that are spread throughout the year instead of a large hit at the end of the year. This will make your monthly or quarterly financial statements more accurate, and this will make it easier for you to make the proper financial decisions during the year. 

 
5. You can spot issues early. For example, you can identify overages on items with limited shelf lives that could be sold at a lower price immediately to avoid having to write them off completely later. You might identify an employee who is particularly careless when handling fragile items so that you can apply the appropriate coaching techniques. Furthermore, you can identify the reasons for discrepancies between your book and physical inventories so that you can make corrections at the source. You might find that items are not being properly recorded on receiving reports, for example, or that one employee has been routinely shipping a case of a particular product instead of the single bottle reflected on the customer’s order and invoice. 
 
Cycle counts are an economical way to boost the accuracy of your inventory reports, and an accurate inventory can provide significant financial benefits. The more frequently you conduct the counts, the more beneficial they are. However, even if you only conduct quarterly cycle counts, you can enhance the effectiveness of your attempts to manage your inventory properly. 

 

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