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Written by: 
Ryan M. Gorman, CPA

While many companies rely solely on year-end physical inventory counts, conducting cycle counts on a regular basis throughout the year may introduce efficiency and accuracy to the inventory management and record keeping process and contribute to profitability.

The Downside of Year End Physicals

It takes a great deal of time and effort to complete a “wall to wall” accurate count of a business’ inventory, and there are opportunity costs as well. Companies generally must shut down operations, including production (in the case of a manufacturer), shipping, and receiving to accomplish a complete, accurate inventory count. 

Full physical inventory counts typically take place at the end of the year. An additional down-side is the impact on efforts to maximize year-end sales and shipments as often incentivized through sales promotions and commission programs. Closing down production and shipping at this time can adversely impact a year-end push to boost revenue.

Quantity variances uncovered during year-end inventory counts may relate to record keeping, shrinkage or other issues that occurred much earlier in the year.  Not only are the variances harder to investigate, but also systemic issues, such as a weakness in physical security or system training issues, are not identified and resolved on a timely basis.

The Benfits of Cycle Counting

Cycle counting involves counting inventory on an ongoing basis using systematic means of rotating part or product numbers through the cycle counting process. Quantity variances found during cycle counts can be adjusted quickly, and investigation into the reasons behind the variances can be conducted right away, addressing any systemic issues.

When a cycle counting system is fully functional, periodic counting– daily, weekly, or monthly – reaps significant operational benefits – enhanced controls, more accurate interim inventory reporting, minimal disruption to operations and the related impact on profitability among them.

Transitioning to Cycle Counts

The decision to implement cycle counting may hinge largely on the size and industry of your company – your count program should be customized to your specific operations and business. If you’re looking to make the switch to cycle counts, consider kicking off your efforts by talking with a company that has a successful cycle counting program.  “Wolf introduced us to another of their manufacturing clients that had a long history of a successful cycle counting program.  Our initial discussions and site visit to that company were valuable to the successful implementation of our cycle counting program.” Rich T., CPA, Controller, Specialty Manufacturer. 

To effectively transition to cycle counts, companies should involve more personnel beyond inventory and operational management.  The accounting and technology or systems teams are critical resources to the cycle counting program implementation process.

Cycle counts have proven to minimize down time, reduce errors and help companies avoid the hassle associated with full year-end physical counts. However, before implementing this solution, companies should thoroughly consider the costs and benefits associated with each approach.  A strong count program, combined with inventory best practices, will contribute to your business’ profitability.