Comparing different inventory

valuation methods:
FIFO, LIFO, and WAC.
Inventory valuation is a key aspect of your inventory
managementtoolkit, because it allows you to evaluate
your Cost of Goods Sold (COGS) and, ultimately, your
profitability. Different inventory valuation methods –
such as FIFO, LIFO, and WAC – can affect your bottom
line in different ways, so it’s important to choose the
right method for your business.

To help you pinpoint the right technique for your

business, we’ve created a guide to the
different inventory valuation methods along with
examples.

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First-in-first-out (FIFO) inventory valuation

According to the first-in-first-out (FIFO) inventory valuation method, it’s
assumed that inventory items are sold in the order in which they’re
manufactured or purchased. In other words, the oldest inventory items
are sold first. The FIFO method is widely used because companies
typically sell products in the order in which they’re purchased, so it
best represents the actual flow of goods in a business.

FIFO method example:

Let’s say a business bought shirts on two separate occasions at two

different prices during a month:

100 shirts at $10

200 shirts at $20

At the end of the month, the business had sold 50 shirts.

With FIFO, we use the costing from our first transaction when we
purchased 100 shirts at $10 each.

So, after selling 50 shirts:

COGS = (50 shirts x $10 FIFO cost) = $500

50 shirts from the first purchase are still left on the shelves, costed at
$10 each, as well as the remaining 200 shirts from the second
purchase at $20 each. So:

Remaining inventory value = (50 shirts x $10 cost) + (200 shirts at $20
cost) = $4,500
Last-in-first-out (LIFO) inventory valuation
The last-in-first-out (LIFO) inventory valuation method assumes that
the most recently purchased or manufactured items are sold first – so
the exact opposite of the FIFO method. When the prices of goods
increase, Cost of Goods Sold in the LIFO method is relatively higher
and ending inventory balance is relatively lower.

LIFO method example:

Using the example above, the LIFO method would use the cost from
the latest transaction when 200 shirts were purchased at $20 each.

After selling 50 shirts:

COGS = (50 shirts x $20 LIFO cost) = $1,000

The 100 shirts that we bought in the first purchase are still left at $10
each. We also have 150 shirts from the second purchase at $20 each.
So:

Remaining inventory value = (100 shirts at $10 cost) + (150 shirts at

$20 cost) = $4,000

Weighted average cost (WAC) inventory valuation

With the WAC inventory valuation method, inventory and COGS are
based on the average cost of all items purchased during a period. This
method is usually used when a business doesn’t have much variation
in its inventory.

Weighted average cost example:

Based on the example above, you have 300 (100+200) shirts, which you
paid $5,000 for in total ($100 x 10 + $200 x $20).
So, your weighted average cost would be the $5000 cost divided by the
300 shirts. This equals $16.67 per shirt.

After selling 50 shirts:

COGS = (50 shirts x $16.67 average cost) = $833.50

Remaining inventory value = (250 shirts remaining x 16.67 average

cost) = $4,167.50
Generally accepted accounting principles (GAAP) and the International
Financial Reporting Standards (IFRS)
It’s important to note that companies in the US operate under the
generally accepted accounting principles (GAAP), while most other
countries adhere to the International Financial Reporting Standards
(IFRS).

What’s the implication of this for inventory valuation? The GAAP

accepts the three most common inventory valuation methods – FIFO,
LIFO, and WAC – while the IFRS doesn’t accept the LIFO method. This
means if your business is based anywhere other than the US, it’s likely
you won’t be using the LIFO valuation method outlined above.

There are also some differences between the way inventory is

recorded according to the GAAP and IFRS. Under the GAAP, inventory
is recorded as cost or market value – whichever is less. The IFRS, on
the other hand, states that inventory should be recorded as cost or net
realizable value – whichever is less.

Which inventory valuation method is right for my business?

Choosing the right inventory valuation method for your business
depends on a number of factors, like where your business is based,
whether your costs are going up or down, and how much your inventory
varies. Most businesses use the FIFO method because it usually gives
the most accurate picture of costs and profitability. But there’s no one-
size-fits-all solution – so it’s best to speak to an accounting
professional to find out what’s best for your business and situation.

What is a perpetual inventory

system?
There are two primary inventory management systems
that businesses use: a perpetual inventory system or
a periodic inventory system.

We’ll go through the features of both systems and

outline why most small and medium sized businesses
should transition to a perpetual inventory accounting
system – and why the prospect of migrating is not as
daunting as it may sound.
How does a perpetual inventory system differ from a periodic system?
A perpetual inventory system is a method of inventory management
that records real-time transactions of received or sold stock through
the use of technology – generally considered a more efficient method
than a periodic inventory system. Each time a transaction is made, the
perpetual inventory system should update all the relevant information
to the company’s accounting system.

A periodic inventory system on the other hand, relies on staff to

undertake regular audits of stock to update inventory information –
which usually involves physically counting the inventory available in
storage, and comparing the outcome with sales data to check for
discrepancies. This is an enormously time consuming task, particularly
for businesses that deal with large volumes of stock. Nevertheless,
businesses that don’t handle many orders, such as car dealerships,
may be better off using a periodic inventory system.

Here are some ways of forming good habits early by tracking

information for your business:

Keeping up with data in real-time

By continually recording sales, returns, discounts and other

miscellaneous transactions, all relevant stakeholders can have access
to important data at any time. This allows businesses to keep up
with real-time demand and make necessary adjustments as more
information becomes available. This is particularly important as a
business becomes more complex.

Leaving a paper trail

As a general rule, the more information that you can compile on your
business, the more detailed the paper trail, and the better it is for
decision making in the long run. Adopting a perpetual inventory system
records interactions that are useful for demand forecasting and other
performance indicators down the line. Information like stock quantity
and availability is integral because you must ensure that stockouts
don’t happen.

Lowering the cost of inventory management

Moreover, a perpetual inventory system allows managers to track

information against physical inventory for discrepancies. Although
occasional physical inventory checks are still good practice –
particularly to check for theft, spoilage, and possible human errors,
there is no need to do daily checks, saving staffing costs. It’s also a
system that saves time as staff no longer have to conduct tedious
inventory counts every day to determine the amount of stock available.

Investigating stock level discrepancies

Under a periodic inventory system, the year-end inventory balance is

typically adjusted to match the results of a physical inventory count.
As a result, it’s easy to discount theft, shrinkage, or counting errors
because it’s the physical inventory count total that is used as a
reference to account for the cost of goods sold. In contrast, a
perpetual inventory system will allow you to investigate any
discrepancies and make any necessary stock adjustments.

Demand forecasting to grow your business

Spreadsheets are a great tool for giving snapshots of your present

inventory situation. As your business grows, however demand
forecasting becomes an integral aspect of managing your inventory
and overall strategy. For many retail and wholesale businesses that
see seasonal fluctuations in demand, being able to access historical
information on sales and inventory can help make good purchasing
decisions in the future.
Many business owners are concerned about the upfront costs
associated with implementing a new system. This is a valid concern –
traditionally, Enterprise Resource Planning systems (ERPs) can be
expensive and difficult to navigate, requiring training sessions that are
an additional drain on resources. It’s a myth that analytics costs tens
of thousands of dollars – restricting their use to large companies with
more resources. With the plethora of cloud-based technology and SaaS
solutions available on the market today, even the smallest companies
have access to forecasting technology.

Cycle counting
December 27, 2017

Cycle Counting Overview

Cycle counting involves counting a small amount of inventory each day, with
the intent of cycling through the entire inventory on an ongoing basis. Any
errors found during these small incremental counts should result in an
adjustment to the inventory accounting records . Also, an investigation into
the reasons for each error found should be conducted. The eventual result
should be detailed procedures and training that yield very low transaction
error rates and high levels of inventory record accuracy.

The items selected for cycle counts can be defined based on many sort
criteria, such as most used or highest cost. The most commonly used method
is simply to start in one corner of the warehouse and progress through the
various aisles and bins, so that all items are counted on a rotating basis. If
the latter method is used, it may also be necessary to recount certain items
more frequently, if they are critical to the production process.

Cycle Counting Benefits

By engaging in cycle counting, a business will almost certainly experience

higher levels of inventory record accuracy, which leads to higher confidence
 in the resulting inventory valuation . This may, in turn, lead to the elimination
of physical inventory counts , since the inventory records are already so
accurate that no physical verification is required. If inventory no longer
needs to be counted at the end of each reporting period, the result can be an
accelerated closing process . If the outside auditors feel they can rely on
these inventory records, they may scale back their audit procedures , which
in turn reduces the audit fees they charge to the company. Also, there would
no longer be a need to pay employees overtime to count inventory, or to
close down the production area while physical counts are conducted.

Cycle Counting Procedure

The following steps are required for a successful cycle counting program:

1. Complete data entry on all inventory transactions, so the inventory

database is fully updated.

2. Print a cycle counting report, which states the bin locations that are to
be counted, and assign it to the warehouse staff.

3. The cycle counters compare the locations, descriptions, and quantities

stated on the report to what they see on the shelf. They also trace what they
see on the shelf back to the report, in case some items have not been
recorded within the database at all.

4. Investigate all differences found and discuss them with the warehouse
manager, and determine whether there is a pattern of errors that may
require further action.

5. If further action is required, alter procedures, training, staffing, or

whatever else is needed to eliminate the error.

6. Adjust the inventory record database to remove the error found by the
cycle counter.
7. On a regular basis, audit the inventory and calculate the inventory
accuracy percentage . Post the results in a public place, and pay bonuses to
the warehouse staff if they attain predetermined record accuracy goals.

Clearly, a high level of commitment to a cycle counting program is needed to

ensure that these steps are followed on an ongoing basis.

Cycle Counting Problems

If the inventory records are not first updated with all outstanding inventory
transactions, it is possible that a cycle counter will detect an error and adjust
it. If the actual transaction is then entered on top of the cycle counter's
adjustment, the result may well be a more inaccurate inventory record than
had originally been the case. This problem is particularly common when the
same inventory item is stored in multiple locations, so there may be
confusion about which location record to adjust for an inventory transaction.

Cycle count
From Wikipedia, the free encyclopedia
Jump to navigationJump to search
This article needs additional citations for verification. Please help improve
this article by adding citations to reliable sources. Unsourced material may be
challenged and removed.
Find sources: "Cycle count" – news · newspapers · books · scholar · JSTOR (September
2018) (Learn how and when to remove this template message)

A cycle count is an inventory auditing procedure, which falls under inventory management, where a
small subset of inventory, in a specific location, is counted on a specified day. Cycle counts contrast
with traditional physical inventory in that a full physical inventory may stop operation at a facility
while all items are counted at one time. Cycle counts are less disruptive to daily operations, provide
an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on
items with higher value, higher movement volume, or that are critical to business processes.
Although some say that cycle counting should only be performed in facilities with a high degree of
inventory accuracy (greater than 95%), cycle counting is one means of achieving and sustaining
high degrees of accuracy. There are specific procedures to use cycle counting to quickly identify root
causes of problems in the processes that control inventories and then monitor the effectiveness of
the actions to eliminate the root causes. In fact, doing conventional inventory audits without having
previously made the control processes reliable is like trying to weigh dry ice - soon after balances
are corrected, the bad processes wrong the balances again. The ideal procedure is to bring the
control processes to reliability through root cause elimination with cycle counting, then perform a full
physical audit to correct all balances, and then continue to use cycle counting to monitor and
sustain. The specific procedures to this approach include the use of control groups, frequent
repetition of counts of inaccurate items (e.g., weekly or twice a month), and prioritization based on
control process vulnerability rather than item values. This approach faces difficulty with the mindset
of making inventory data periodically accurate for accounting books' purposes but it is essential with
the mindset of perfecting control processes so inventory data are continuously accurate for minute-
to-minute support to operations. The purpose of cycle counting is to verify the inventory accuracy
and even though it is not an adequate procedure to be used to correct inventory errors, it is an
adequate way to identify the root causes of inventory errors. In contrast, identifying root causes,
agreeing on actions to eliminate them and implementing them to the point of perfecting control
processes is virtually impossible with traditional inventory audit approaches.

ABC analysis[edit]
Most cycle counting applications use ABC analysis, segregating items into various count
frequencies.

Determining selection method and count frequency[edit]

There are several methods of selecting which items to count and with what frequency, and each
method has strengths and weaknesses.
Pareto method[edit]
The Pareto method, derived from the Pareto principle, is to cycle count inventory by percentage of
inventory value (cost multiplied by usage for period). Items with a higher determined value are
counted more often, while items that have little movement are seldom counted.
This approach appeals to accountants by minimizing the variance in inventory value and is efficient
from a supply chain managementperspective, concentrating effort on higher volume of use items.
[1]
The main shortcoming is that low value items may be ignored and cause an entire assembly line to
halt while a minor component is re-ordered.
Cycle counting by usage only[edit]
Cycle counting by usage states that items more frequently accessed should be counted more often,
irrespective of value. Every time an employee adds or removes an item, there is a risk of introducing
inventory variance. Logical inventory zones can be set up to distinguish items depending on how
frequently they are touched. This method may be biased against counting higher value inventory or
require additional counting to satisfy accounting requirements.
Hybrid[edit]
Most cycle counting frequencies are determined first by Pareto frequency analysis, and then
changing the count frequency, or ABC code, as needed per item is based on per piece value, how
critical the part may be, or other factors. This method requires manual arrangement and is not
statistically pure since arbitrary adjustments can be made.
Objective counting by surface area[edit]
Cycle counting that begins from one end of the store to the other, based on surface area. Combing
over each rack or shelf, that is assigned per counter. This method requires planning, in which a map
of the store is required and counting forms for the recording of stock information that will then need
updating to the inventory management system.

Automation[edit]
To conduct efficient and accurate cycle counts, many organizations use some form of software to
implement an inventory control system, which is part of a warehouse management system. These
systems may include mobile computers with integrated barcode scanners that allow the operator to
automatically identify items, and enter inventory counts via keypad. The software transmits data to
a database on a host system which can generate inventory reports.
Based on user defined criteria, the software will select a number of items to count at specific
locations for the specified period of time. Ideally, these selections are daily but many companies
choose to generate cycle count items weekly.
Many companies perform "mini" physical inventories and call it cycle counts. Instead of using
random or system generated part numbers at specific locations to count, they selectively choose
specific locations and count everything in those locations. As part of their procedures they rotate
throughout the plant with the intention of counting every location a minimum of once each year. This
is an effective alternative to true cycle counting where a company may not have the sophistication to
utilize cycle counting software.

Risks[edit]
Cycle counts can introduce inventory errors if the cycle count process is poorly executed. Multiple
locations per item, work in process, and lag in paperwork processing can each contribute to errors.
This problem can be mitigated with correct cycle count procedures that specify not only the part
number to be counted but also the location it should be in. Cycle counting is only effective in
companies with a well-defined inventory control procedure and a high degree of inventory accuracy.

Cycle count
From Wikipedia, the free encyclopedia
Jump to navigationJump to search
This article needs additional citations for verification. Please help improve
this article by adding citations to reliable sources. Unsourced material may be
challenged and removed.
Find sources: "Cycle count" – news · newspapers · books · scholar · JSTOR (September
2018) (Learn how and when to remove this template message)

A cycle count is an inventory auditing procedure, which falls under inventory management, where a
small subset of inventory, in a specific location, is counted on a specified day. Cycle counts contrast
with traditional physical inventory in that a full physical inventory may stop operation at a facility
while all items are counted at one time. Cycle counts are less disruptive to daily operations, provide
an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on
items with higher value, higher movement volume, or that are critical to business processes.
Although some say that cycle counting should only be performed in facilities with a high degree of
inventory accuracy (greater than 95%), cycle counting is one means of achieving and sustaining
high degrees of accuracy. There are specific procedures to use cycle counting to quickly identify root
causes of problems in the processes that control inventories and then monitor the effectiveness of
the actions to eliminate the root causes. In fact, doing conventional inventory audits without having
previously made the control processes reliable is like trying to weigh dry ice - soon after balances
are corrected, the bad processes wrong the balances again. The ideal procedure is to bring the
control processes to reliability through root cause elimination with cycle counting, then perform a full
physical audit to correct all balances, and then continue to use cycle counting to monitor and
sustain. The specific procedures to this approach include the use of control groups, frequent
repetition of counts of inaccurate items (e.g., weekly or twice a month), and prioritization based on
 control process vulnerability rather than item values. This approach faces difficulty with the mindset
of making inventory data periodically accurate for accounting books' purposes but it is essential with
the mindset of perfecting control processes so inventory data are continuously accurate for minute-
to-minute support to operations. The purpose of cycle counting is to verify the inventory accuracy
and even though it is not an adequate procedure to be used to correct inventory errors, it is an
adequate way to identify the root causes of inventory errors. In contrast, identifying root causes,
agreeing on actions to eliminate them and implementing them to the point of perfecting control
processes is virtually impossible with traditional inventory audit approaches.

Contents

 1ABC analysis

 2Determining selection method and count frequency

o 2.1Pareto method

o 2.2Cycle counting by usage only

o 2.3Hybrid

o 2.4Objective counting by surface area

 3Automation

 4Risks

 5References

ABC analysis[edit]
Most cycle counting applications use ABC analysis, segregating items into various count
frequencies.

Determining selection method and count frequency[edit]

There are several methods of selecting which items to count and with what frequency, and each
method has strengths and weaknesses.
Pareto method[edit]
The Pareto method, derived from the Pareto principle, is to cycle count inventory by percentage of
inventory value (cost multiplied by usage for period). Items with a higher determined value are
counted more often, while items that have little movement are seldom counted.
This approach appeals to accountants by minimizing the variance in inventory value and is efficient
from a supply chain managementperspective, concentrating effort on higher volume of use items.
[1]
The main shortcoming is that low value items may be ignored and cause an entire assembly line to
halt while a minor component is re-ordered.
Cycle counting by usage only[edit]
Cycle counting by usage states that items more frequently accessed should be counted more often,
irrespective of value. Every time an employee adds or removes an item, there is a risk of introducing
inventory variance. Logical inventory zones can be set up to distinguish items depending on how
frequently they are touched. This method may be biased against counting higher value inventory or
require additional counting to satisfy accounting requirements.
Hybrid[edit]
Most cycle counting frequencies are determined first by Pareto frequency analysis, and then
changing the count frequency, or ABC code, as needed per item is based on per piece value, how
critical the part may be, or other factors. This method requires manual arrangement and is not
statistically pure since arbitrary adjustments can be made.
Objective counting by surface area[edit]
Cycle counting that begins from one end of the store to the other, based on surface area. Combing
over each rack or shelf, that is assigned per counter. This method requires planning, in which a map
of the store is required and counting forms for the recording of stock information that will then need
updating to the inventory management system.

Automation[edit]
To conduct efficient and accurate cycle counts, many organizations use some form of software to
implement an inventory control system, which is part of a warehouse management system. These
systems may include mobile computers with integrated barcode scanners that allow the operator to
automatically identify items, and enter inventory counts via keypad. The software transmits data to
a database on a host system which can generate inventory reports.
Based on user defined criteria, the software will select a number of items to count at specific
locations for the specified period of time. Ideally, these selections are daily but many companies
choose to generate cycle count items weekly.
Many companies perform "mini" physical inventories and call it cycle counts. Instead of using
random or system generated part numbers at specific locations to count, they selectively choose
specific locations and count everything in those locations. As part of their procedures they rotate
throughout the plant with the intention of counting every location a minimum of once each year. This
is an effective alternative to true cycle counting where a company may not have the sophistication to
utilize cycle counting software.

Risks[edit]
Cycle counts can introduce inventory errors if the cycle count process is poorly executed. Multiple
locations per item, work in process, and lag in paperwork processing can each contribute to errors.
This problem can be mitigated with correct cycle count procedures that specify not only the part
number to be counted but also the location it should be in. Cycle counting is only effective in
companies with a well-defined inventory control procedure and a high degree of inventory accuracy.

Cycle counting
December 27, 2017
Cycle Counting Overview
Cycle counting involves counting a small amount of inventory each day, with
the intent of cycling through the entire inventory on an ongoing basis. Any
errors found during these small incremental counts should result in an
adjustment to the inventory accounting records . Also, an investigation into
the reasons for each error found should be conducted. The eventual result
should be detailed procedures and training that yield very low transaction
error rates and high levels of inventory record accuracy.

The items selected for cycle counts can be defined based on many sort
criteria, such as most used or highest cost. The most commonly used method
is simply to start in one corner of the warehouse and progress through the
various aisles and bins, so that all items are counted on a rotating basis. If
the latter method is used, it may also be necessary to recount certain items
more frequently, if they are critical to the production process.

Cycle Counting Benefits

By engaging in cycle counting, a business will almost certainly experience

higher levels of inventory record accuracy, which leads to higher confidence
in the resulting inventory valuation . This may, in turn, lead to the elimination
of physical inventory counts , since the inventory records are already so
accurate that no physical verification is required. If inventory no longer
needs to be counted at the end of each reporting period, the result can be an
accelerated closing process . If the outside auditors feel they can rely on
these inventory records, they may scale back their audit procedures , which
in turn reduces the audit fees they charge to the company. Also, there would
no longer be a need to pay employees overtime to count inventory, or to
close down the production area while physical counts are conducted.

Cycle Counting Procedure

The following steps are required for a successful cycle counting program:
1. Complete data entry on all inventory transactions, so the inventory
database is fully updated.

2. Print a cycle counting report, which states the bin locations that are to
be counted, and assign it to the warehouse staff.

3. The cycle counters compare the locations, descriptions, and quantities

stated on the report to what they see on the shelf. They also trace what they
see on the shelf back to the report, in case some items have not been recorded
within the database at all.

4. Investigate all differences found and discuss them with the warehouse
manager, and determine whether there is a pattern of errors that may require
further action.

5. If further action is required, alter procedures, training, staffing, or

whatever else is needed to eliminate the error.

6. Adjust the inventory record database to remove the error found by the
cycle counter.

7. On a regular basis, audit the inventory and calculate the inventory

accuracy percentage . Post the results in a public place, and pay bonuses to the
warehouse staff if they attain predetermined record accuracy goals.

Clearly, a high level of commitment to a cycle counting program is needed to

ensure that these steps are followed on an ongoing basis.

Cycle Counting Problems

If the inventory records are not first updated with all outstanding inventory
transactions, it is possible that a cycle counter will detect an error and adjust
it. If the actual transaction is then entered on top of the cycle counter's
adjustment, the result may well be a more inaccurate inventory record than
had originally been the case. This problem is particularly common when the
same inventory item is stored in multiple locations, so there may be
confusion about which location record to adjust for an inventory transaction.

When it comes to implementing a cycle counting program, you will achieve

the greatest results when you choose the best method for your needs. There
are several sampling methods available for your warehouse. Despite their
differences, they still share all of the benefits that make cycle counting useful
in the first place. So how should you go about evaluating the various methods
for your warehouse?

Location of Products

One factor that can impact the method you choose is the physical location of
items within your warehouse. Depending on the size of your staff, it may be
impractical to send your counters out to canvas your entire floor. You may
choose to conduct random sampling by zone each day or dispatch ABC-
based counts in one area at a time throughout the day.

Product Categories

Depending on what kind of warehouse you are managing, it may also be

helpful to consider what product categories you are dealing with. If you have a
mix of finished products and unfinished products, there may be reasons to
count them separately.

Value

Another common factor that will help you decide on a cycle counting method
is the relative value of your products. In general, ABC counting is used when
there are highly valuable items mixed in with low value items because this
system prioritizes certain items above others. The random sample method
may not provide adequate insight into inventory discrepancies in your most
valuable items.

Sales Rankings

Building off of the value of your products is the concept of sales rankings. In
this case, you are not just looking at the relative value of a single piece of
inventory, but the total volume of those items being sold. Higher volume items
rank higher than slower moving products, even if they may be higher priced by
unit. This is another case for the ABC counting method.

These are the four main points you should be considering as you decide
which cycle counting method will serve you best. The ABC method is the
most popular method today, but in some cases the random sampling method
may be better suited to your needs. In addition, you should plan to improve
your cycle counting program over time. With this in mind, you may choose to
 launch a random sampling program to begin with and later upgrade to a more
advanced ABC program after you have collected enough data to separate
your products into each category.

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6 Tips for a More Effective Cycle Count

If you’re like most businesses, you recently finished up your inventory counts for 2015. This means you’re
probably feeling the pain from having to reconcile numbers that were too far off, learning how much cash
was tied up in aged inventory, and investing precious overtime pay into dealing with issues related to
improper inventory practices.

If you’d like to avoid these issues in the future, it’s imperative that you improve your cycle counting
process. Here’s how.
Six Tips for More Efficient and Accurate Cycle
Counting
Cycle counting only works well when you employ the proper techniques. Even the best cycle counting
strategy is useless without proper attention to detail. Let’s review some helpful tips that will empower you
to be more efficient and accurate with your cycle counting efforts in 2016 and beyond.

1. Understand the Theory Behind Cycle Counting

Any time you start leveraging a new business technique, strategy, or approach, it’s of paramount
importance to identify the theory behind it so you understand the purpose and desired outcome. This is
definitely the case if you adopt cycle counting.

If you don’t understand the “why” behind cycle counting, you’ll never be able to achieve the desired
results. Although there are plenty of discussions and explanations of the purpose of cycle counting, few
are as good as the description offered by logistics and supply chain expert Martin Murray.

“When a cycle count is performed, there are two inferences that are made,” Murray writes. “The primary
inference is that the accuracy of the items in the cycle count can be used to determine the accuracy of the
items in the warehouse as a whole.”
“The other inference,” he continues, “is that if an error is found in the cycle count, then that error could be
expected to occur for other items in the warehouse.” You must grasp these two concepts if you’re going to
make good use of the time you invest in this approach to doing inventory.

2. Recognize the Different Types

It’s also important that you recognize the different types of cycle counting. Let’s take a brief look at three
of the most common approaches:

 ABC inventory analysis. One of the most commonly used methods is the ABC inventory
analysis approach. This strategy ranks SKUs based on the highest to lowest annual sales
volume at cost. It uses the 80/20 rule, which says 80 percent of the volume in the warehouse
comes from only 20 percent of the SKUs. Under this method, every item is assigned a letter. “A”
items account for the top 80 percent of sales, and “B” items account for the next 15 percent.
Finally, “C” items represent the final 5 percent of sales. Generally speaking, more than half of
your SKUs will be “C” items.
 Control group cycle counting. This method focuses on a small group of items that are
counted a number of times across a very short time period. Over time, this repetitive counting
uncovers any errors in the count technique. After you correct the errors, the process can be
applied across multiple product categories.
 Random sample method. This approach to cycle counting entails the periodic selection of
random items. This method is most commonly used in warehouses that contain a large quantity
of similar items.
Depending on the structure of your company, the number of different products you have in inventory at
any given moment, and the frequency with which you want to count, you may find one of the above
approaches more beneficial than the others.

3. Conduct as Many Counts as Possible

The goal of cycle counting is to conduct just the right number of counts to enable you to maintain an
accurate assessment of inventory levels without having to invest a tremendous amount of time.

In order to ascertain this sweet spot, you’ll probably need to experiment over the course of several years.
In your first year, aim for at least four full cycle counts.

“I recommend developing a 13-week cycle count calendar,” writes Ted Hurlbut, an inventory management
specialist. “You should schedule to count everything at least once in that 13-week period, and your faster-
turning, higher-volume items and categories two or three times.”
Over time, you’ll figure out whether you need fewer or more cycle counts for an accurate accounting of
inventory.

4. Have an Organized Plan

If cycle counting is to be effective for your business, you have to have a fully discussed and well-
documented plan. Every business operates under different restrictions and regulations, so you can’t
necessarily model your plan after one another company uses, but it’s imperative that you identify an
organized strategy that works for you.
For some, this looks like arriving at the warehouse at 6 a.m. every morning, unlocking the doors, cranking
up the computers, and cycle counting until 7:30 a.m. For others, it will involve moving lunch back an hour
for two employees and asking them to cycle count at noon on Mondays, Wednesdays, and Fridays. Find
a plan and stick to it.

5. Budget for Growth

You need to consider growth when you cycle count. As your business scales, so will your inventory levels.
Over time, this may require you to alter your plan, hire more employees, or switch up counting
techniques. Approach these issues as they come; just recognize that they’re coming.

6. Assign a Full-Time Employee

As a business owner, you need to be committed to cycle counting … but it can’t be your job. You have far
too many other responsibilities to worry about. Find a trusted full-time employee to head up cycle
counting.

It doesn’t have to be the person’s only job, but it should be a major part of his or her position. This will
help your count attain continuity and accuracy.

Contact QStock Inventory Today

At QStock Inventory, we specialize in helping small and large businesses manage inventory efficiently
and accurately for maximum profitability and unobstructed insight into critical processes. If you’ve
struggled with inventory management in the past, and are looking for a solution that seamlessly integrates
with QuickBooks or Intacct, you’ve come to the right place.

If you are currently running Intacct or Quickbooks and would like to schedule a free consultation to see if
QStock is right for you, from cycle counting to other parts in the warehouse, as your next potential
Warehouse management system, Contact Us Today by filling in the form below. We would love to hear
about your business and how QStock can help you achieve your business goals.
SAMPLING TECHNIQUE OF CYCLE COUNTING METHOD