Keeping inventory records accurate is critical for any business that sells products But how often should you perform cycle counts versus full physical inventories? What are the pros and cons of each?
In this complete guide, we’ll compare cycle counting and physical inventories so you can determine the best approach for your business Let’s dive in..
What is a Cycle Count?
A cycle count is a regular sampling of select inventory items to identify discrepancies between recorded balances and actual quantities on hand.
During a cycle count, only a subset of inventory is counted each time. Different items are selected on a rotational basis.
The key benefits of cycle counting include:
- Ongoing visibility into inventory accuracy
- Easy to fit cycle counts into daily workflows
- Minimal business disruption
- Early detection of issues like shrinkage, transactions errors, etc.
Cycle counting is most useful for businesses with:
- A large number of SKUs
- High transaction volume
- Limited staff resources
- Inventory prone to shrinkage/errors
It provides a balanced approach to catch discrepancies early before they multiply.
How Does Cycle Counting Work?
There are three key steps in the cycle counting process:
1. Select inventory samples. You’ll select certain items to count each period. Popular selection methods include:
- ABC analysis (counting high-value goods more often)
- Random sampling
- Targeting fast/slow-movers, high-shrinkage items, etc.
2. Perform counts. Physically count the selected items and record the quantities on hand.
3. Research & adjust. Compare to inventory records. Research discrepancies to identify their root cause. Make system adjustments to align with actual stock levels.
Depending on the frequency, cycle counting can provide perpetual visibility into inventory accuracy.
What is a Physical Inventory?
A physical inventory, or full stocktake, is a comprehensive count of all inventory items at once. Everything in the warehouse is counted.
The primary benefits of a physical inventory include:
- Total validation of stock levels and records
- Detection of cumulative discrepancies
- Opportunity for process improvements
- Verification of inventory valuation for accounting
Physical inventories are most useful for:
- Annual audits
- Before major accounting events
- After major security breaches
- When cumulative errors are suspected
It provides a complete “reset” of your inventory records.
How Does Physical Inventory Work?
Conducting a physical inventory has five main steps:
1. Planning. Schedule appropriate dates. Assign count tasks. Assemble supplies. Freeze transactions during count.
2. Counting. Thoroughly count all inventory items. Record quantities using prepared count sheets.
3. Validation. Have second person recount samples to verify accuracy.
4. Adjustments. Compare to book balances. Make corrections in the system based on actual stock on hand.
5. Analysis. Identify the cause of discrepancies. Make process improvements to prevent future issues.
It takes far more time and labor than cycle counting, but provides comprehensive visibility.
Cycle Count vs. Physical Inventory: Key Differences
Let’s compare some of the main differences between cycle counts and physical inventories:
| Factor | Cycle Count | Physical Inventory |
|---|---|---|
| Scope | Counts a sample of items each period | Comprehensive count of all inventory |
| Frequency | Frequent, even daily | Infrequent, often annually |
| Disruption | Minimal, part of daily operations | High, dedicated event |
| Labor Needs | Low, fits into normal workflows | High, requires all hands on deck |
| Accuracy | Good, but misses cumulative errors | Excellent, “resets” entire inventory |
| Use Cases | Ongoing monitoring of top products | Annual audits and resets |
When Should You Use Cycle Counting vs. Physical Inventories?
Here are some best practices for when to use each approach:
Use cycle counting for:
- Regular monitoring of inventory accuracy
- High-value and high-shrink items
- Items with frequent transactions
- Businesses with limited staff
- Ongoing auditing between physical inventories
Use physical inventories for:
- Annual accounting of total inventory value
- Verifying records before a major accounting event
- After major security breaches or suspected theft
- When cumulative errors have built up over time
- Gaining “ground truth” of actual stock levels
For most businesses, a combined approach is best. Use cycle counting for continual monitoring and periodic physical inventories for complete resets.
Tips for Effective Cycle Counting
Follow these tips to get the most out of your cycle counting process:
- Count faster-moving items more frequently
- Stratify items into ABC classes based on value
- Randomize selections to avoid counting the same items
- Count during less busy hours to minimize disruption
- Provide counters with optimized mobile tools
- Re-count samples for verification
- Make process adjustments to address root causes of errors
Refine your selection criteria and procedures over time as you learn.
Tips for Efficient Physical Inventories
Here are some tips for completing physical inventories swiftly and accurately:
- Schedule during slower sales periods
- Freeze non-essential transactions during count
- Organize items and locations efficiently
- Provide counters with mobile devices and barcode scanners
- Implement stringent counts and re-counts
- Assign zones and keep a master list of count sheets
- Perform counts in teams with supervisors
- Schedule count tasks to minimize bottlenecks
- Automate reconciliations and adjustments where possible
Proper planning and organization is key to minimizing disruption.
Best Practices for Inventory Accuracy
To optimize overall inventory accuracy, combine cycle counting and periodic physical inventories with these best practices:
- Maintain organized warehouse layouts and storage locations
- Document detailed inventory procedures and provide training
- Restrict access and implement security controls
- Track inventory transactions diligently
- Perform occasional spot checks outside of cycle counts
- Review cycle count and physical inventory reporting frequently
- Address root causes of errors through process improvements
Continual monitoring, disciplined procedures and training will help significantly.
Key Takeaways on Cycle Counts vs. Physical Inventories
- Cycle counts provide ongoing visibility through sampling items.
- Physical inventories comprehensively validate entire inventory.
- Cycle count frequently for monitoring, physical inventory annually.
- Cycle counts minimize disruption, physicals provide complete reset.
- Leverage cycle counting for high-value, fast-moving goods.
- Physical inventories are vital before major accounting events.
- Combine approaches and strengthen procedures for best results.
Knowing when to utilize cycle counts versus physical inventories can optimize accuracy while minimizing business disruption. Use both as part of a comprehensive inventory management strategy.
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What Is a Physical Inventory Count?
What is the difference between a physical inventory and a cycle counting?
A result of greater than 90% may seem reasonable, but the goal is to achieve almost 100% accuracy. A physical inventory counts all stock in a building, usually once or twice a year. Cycle counting counts small, preselected sections of inventory multiple times a year, sometimes as often as daily.
Why is cycle counting important in inventory management?
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.
What is the difference between a physical count and a cycle count?
While physical counts provide certainty about inventory at the beginning of a new financial year, cycle counting is more closely aligned with the needs of many businesses for greater flexibility, agility and up-to-date information that informs decision-making.
Should a company perform a cycle count?
Many companies perform cycle counting in addition to an annual physical count, often a good approach for those who have a solid grasp on their inventory. You can perform cycle counting by scheduling high frequency, regular counts of sections or bays as part of everyday operations.
