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Managed Accounting, Technology Strategy

Cycle Counting vs. Physical Counting: Choosing the Right Inventory Counting Method

Posted on April 18, 2024

By Stephen Solt

May 16, 2024

In today’s competitive market, precise inventory management is vital for a business’s success. It helps meet customer demands, minimizes out-of-stock situations, and optimizes supply chain processes. Two common methods for inventory counting are cycle counting and physical counting. These methods differ in many ways, but both are vital for ensuring inventory accuracy. In this article, we’ll explore the key differences between cycle counting vs. physical counting, and tell you which method might be best for your business.

What is Cycle Counting?

Cycle counting is a process where a company regularly counts a small portion of its inventory. This ensures that all items are counted within a specific period. By using methods similar to those used in surveys, companies use these small samples to gain a more accurate picture of their entire inventory.

When starting cycle counting, companies may intentionally count the same items multiple times. This is done to check if different people get the same results. It also helps identify and correct any issues with the counting methods, ensuring everyone adheres to best practices and produces accurate data. To ensure the reliability of a cycle count, companies often work with their internal or external auditors. If cycle counts prove to be accurate over time, auditors and accountants may accept them instead of a full physical count. Why work with accountants? It’s important to divide responsibilities into any task involving valuable items management. The people who handle certain items all year should not be the ones to count them.

What is Physical Counting?

Physical counting is a traditional inventory counting method. It involves a company setting aside a few days to count every item in all its locations, such as warehouses and retail sites. The result is a comprehensive count that can be used to verify that your inventory management system accurately reflects what’s actually on the shelves.

Physical counts can be time-consuming and disruptive to business, so they’re typically done once a year. In fact, companies often have to pause some operations, like shipping and receiving, during physical counts. Even when using advanced inventory-scanning techniques like radio frequency (RF) tags, the process can still require significant labor.

Companies have long valued the annual physical count as a way to understand their inventory at the start of the fiscal year and make necessary adjustments to their records. This enables them to make informed business decisions. Smaller businesses often find that the effort required for an annual physical count is manageable and don’t see a strong need to change.

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Cycle Counting vs. Physical Counting: Key Differences

Both cycle counting vs. physical counting are methods to improve inventory management. However, they have several significant differences that impact daily warehouse operations. These differences include:

Planning

Companies with dedicated staff for inventory management may conduct cycle counts daily or on specific days of the week. Regardless of the approach, cycle counting is a recurring process. For it to be effective, companies must stick to the scheduled times. In contrast, a physical count is done once a year and can disrupt ongoing business operations.

Items Counted

With cycle counting, businesses can count different items at various times. The sample can be chosen randomly or based on a predetermined method.
In a physical count, all items are counted at once, and the operation ends once every item is tallied.

Flexibility

Cycle counts offer businesses various approaches to inventory verification. They might count items based on value, quantity, or category, focusing on the most significant items. While you might start focusing on certain items during a physical count, you still need to complete the count within the set time.

Disruption Level

Implementing cycle counts is often similar to other standard business procedures. Since it rarely causes disruption, its impact on daily operations may go unnoticed. You might only realize it’s happening when you see team members counting.

On the other hand, a physical count can halt some processes and require significant time and effort. If staff is involved, shipping and receiving may be delayed. Many companies hire temporary workers to maintain smooth operations during the physical count.

Business Types

Cycle counts are advantageous for large businesses with extensive inventories. They may not have the time for a physical inventory, making cycle counts a beneficial alternative. For smaller businesses with fewer items, an annual physical inventory may be more convenient than spending more time on cycle counts. Companies with large inventories might spend extra time on physical inventory counts to comply with IRS regulations and generally accepted accounting standards.

The following table compares both methods at a glance:

  Cycle Counting Physical Counting
Scheduling Continuous Occasional
Items Counted Selected SKUs for a specific time frame. All items or SKUs at once.
Disruption Level Low. High.
Information Provided A count of selected items regularly. Exact inventory counts for every SKU. Every year, authoritative and thorough information
Staffs Needed It may be the duty of a specific team of staff and integrated into the duties of other employees. It may need the complete attention of many staff and some temporary employees.
Flexibility Level Substantial Minimal
Company Types Typically, those with big, increasing, or complicated inventories in which physical counting is problematic. Physical counting is often less disruptive for individuals with smaller inventories. They may be required for financial reporting by public firms as well as certain auditors and accountants.

How to Choose the Right Inventory Counting Method

As warehouses and facilities expand, conducting annual physical inventory counts becomes more challenging, time-consuming, and expensive. This is where cycle counting comes into play in inventory management. Often, companies’ inventory management strategies use a combination of cycle counting and physical counts.

Take retailers as an example. They may carry out annual cycle counts, focusing on products in high demand. After the Christmas season, they might conduct a complete physical inventory count. On the other hand, some companies might opt to do a final physical count to establish a strong foundation before transitioning to cycle counting. By using a hybrid strategy that combines physical inventory with cycle counting, companies can effectively balance the advantages of both methods. This ensures accurate inventory records.

Discover Cycle Counting vs. Physical Counting with Help from KDG

Effective inventory counting methods are crucial for maintaining accurate stock levels and enhancing business processes. Physical counts provide complete accuracy, while cycle counts allow for ongoing verification and help identify the root causes of discrepancies.

Companies need to evaluate their inventory nature, understand their specific needs, and strike a balance between operational disruptions, costs, and accuracy. Book a meeting with us today to learn more about how we revolutionizing the way warehouses operate. We can turn challenges such as inventory precision and space utilization into opportunities.

Steve Solt headshot

Stephen Solt is a Senior Accountant at KDG. With his eye for detail, his ability to problem solve, and his dedication to customer service, he’s helped numerous businesses see their financial futures clearly.

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