If your organization maintains inventory, Generally Accepted Accounting Principles (GAAP) and IRS rules require you to either count your complete inventory on an annual basis or implement a perpetual counting system. So, which counting system is right for your organization? Arriving at a consensus on the method of inventory management in your distribution model is not a simple process. Below we will discuss two methods for inventory counting and how to decide which one is right for you.
Cycle counting is a perpetual counting system where a small subset of inventory, in a specified location, is counted on a specified day. By performing cycle counts, you are regularly validating the accuracy of the inventory in your system. This method of counting is popular among large scale organizations that have a large number of items in inventory and cannot be closed for a long period of time to perform an annual physical inventory count. By utilizing cycle counts, organizations experience the following benefits:
- Reduce disruption in your operation
- Saves money
- Less complex than doing an annual physical count
Not only does cycle counting improve accuracy of the count, but it allows for an annual review of each line or segment of products. This process improves inventory turnover by giving buyers insight into what items should continue to be stocked and help analyze missed sales opportunities.
Although the benefits of cycle counting have made annual physical counts almost obsolete, some organizations that maintain a small inventory may decide on an annual physical count. An annual physical count is the counting of all SKU’s within a short time frame and is typically done once a year.
Shutting down operations at the end of each year and counting inventory allows you to start the new year with a clean slate is one advantage to performing an annual physical count. Although starting the new year fresh is nice, the disadvantages of annual physical counts typically outweigh the benefits. Some of the drawbacks to annual physical counts include:
- Shipping and receiving operations must be shutdown to count all inventory
- Can be time and resource consuming
- Providers which are not automated have a higher likelihood of error
Some organizations opt to perform both an annual count and periodic cycle counts. This allows them to closely manage inventory variances and update accounting records. Implementing an effective inventory counting program has many benefits. Using the right counting method can help you discover process errors and inefficiencies, improve accuracy & productivity, and provide better customer service with more accurate records and having items in stock when they are ordered.