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What is Cycle Counting and How it Eliminates 'Shut Down' Inventory Audits

Posted by Angela Dion on Thu, Aug 04, 2016 @ 05:02 PM


What is Cycle Counting?

Cycle counting is an inventory auditing process where a small subset of inventory, in specific locations, are counted at regularly scheduled time intervals. Over a designated amount of time, all the inventory is cycled through and accounted for and this process can be repeated as frequently as required.

Any discrepancies found during these incremental counts would be adjusted within the accounting system, both for the quantitative data to ensure accurate numbers for stock on hand and its financial value to the business.

Inventory Practices of the Past

Typical Inventory audits might have included periodic counts of all items on hand at one time. Audits could be performed over any period - monthly, quarterly or annually or less or more frequently.  This method can work but has significant challenges. The longer the span between counts, the larger the chance for errors to erupt. If discrepancies are not noticed until end of year, this can have a dramatic impact on your P&L (profit and loss) statements, cash flow and taxation status.

Performing a count on 100% of your inventory requires you to halt operations. Staff is often brought in (or additional 3rd party help), sometimes after hours or for longer hours, to facilitate the manual counts and they are under high pressure to cover a lot of area in a short amount of time. For most, this is not cost-effective or adequate to meet company revenue goals, even when planned for.

Top 10 Benefits of Cycle Counting - Why It Beats An Annual Inventory Audit

  1. Highly accurate inventory count is maintained at all times.
  2. Reduced errors in transactions.
  3. Keeps your business open. Runs as a perpetual process throughout the year. There is no need to shut down all operations when an inventory count is required.
  4. Saves money and resources. Eases the burden of an ‘all hands on deck’ inventory count, often resulting in staff overtime payouts.
  5. Team are trained and are used to performing this consistent process. There are no ‘knowledge gaps’ when preparing for an audit.
  6. Manageable and consistent workload with count spread out over the inventory and over time.
  7. Consistent, accurate measurements for improved inventory valuation.
  8. Quicker closing process for accounting.
  9. Reduced auditing fees when trusted accounting procedures and software are in place.
  10. Produce accurate financial reports anytime throughout the year.

How Cycle Counting Benefits Each Department

The biggest advantage of cycle counting is being able to consistently track inventory and still maintain daily operations. It also allows for all departments to rely on the numbers to continue doing their respective jobs:

  • Accounting: Mainly concerned with being able to know and report on the monetary value of stock on-hand at all times.
  • Warehouse Operations: Wants accurate count on quantity to prepare and plan for replenishment, shipping, receiving and any volume coming in and out of their storehouse.
  • Sales: Pushes internal staff to meet customer needs and always needs an accurate count of stock on hand to fulfill orders and make their quotas.
  • CEO/Owner: Requires reporting on company status at any time and with inventory being the biggest asset of most businesses, it’s critical to know where you stand.

A Basic Overview Of The Cycle Counting Procedure Includes:

  1. Ensure all data entry on outstanding transactions are complete.
  2. Print a report on the specific bin locations or inventory group you want to count.
  3. Assign person to compare the numbers on the report to what they physically see on site. They also report other items on site that may not be represented in the report if they are in the same bin or inventory type.
  4. Analysis of any discrepancies are discussed to understand errors.
  5. Adjust inventory database to reflect actual counts on hand.

This process is continued across different sections of inventory. If the source of errors are determined, appropriate actions are implemented to reduce future inaccuracies.

A common issue to watch for is when an item is stored in multiple locations. Inventory records need to be updated to reflect the current inventory of a specific location only. Also, if the initial report isn’t completely updated before the count starts, it will result in skewed and confused analysis. Ensure your transactions are all completed and reporting is current before starting your counts.

How to do Cycle Counting with SAP Business One

SAP Business One allows organizations the flexibility to manage cycle counts from a somewhat manual process all the way to a fully automated process. Organizations with large inventory counts may want to take advantage of a fully automated process to gain maximum efficiencies. When using SAP Business One to manage your inventory data, many of these processes can be streamlined.

SAP Business One enlists the ABCD category method for customizing inventory management so you can define the time intervals to count certain materials. This system provides the option to include or exclude certain items from categories and assign materials to the categories according to consumption levels or other requirements. SAP Business One notifies appropriate stakeholders to carry out the cycle counts, allowing for better time management, a more efficient process and for reports to be readily available when needed.

While this is really just a general overview of what SAP Business One can do, it’s important to have an inventory consultant from Vision33 help you determine what system would work best for your business. We’ve seen many of our customers experience significant results in cost reduction and increased efficiency when applying cycle counting to their internal processes.

Watch the video on our client David Leadbetter Golf and see how cycle counting allowed them to reduce on-hand inventory by 17% for an optimal stock environment and cash flow.

Re-evaluate Your Inventory Accounting Policies and Procedures

The best-run businesses are constantly looking at ways to reduce costs, optimize efficiency in processes and introduce sustainable practices that produce profit. Whether you are a manufacturer, distributor, retailer or somewhere along the supply chain, adopting lean and consistent inventory practices are proven to have immediate impact on company balances and customer service.

If you are still using Excel spreadsheets, manual paper processes or basic accounting software, get in touch with Vision33 so we can show you how to better automate these processes and reports.

Click here to download our quick Inventory Management Assessment. You’ll be able to better understand your inventory flow and determine if it’s a good time to transition to a system designed to analyze and accurately report real-time inventory data.

 Access the Inventory Management Assessment

Tags: SAP Business One, ERP, Small Business Tips, Supply Chain Management, Inventory Management