Table of contents
It’s impossible to sell in different ways if you don’t know what’s in stock. The importance of inventory management has only increased during the pandemic, as many sellers have changed how they operate their businesses.
“Not being in the stores as much has made it harder to know exactly what’s there,” says Keith Miller, the owner of Bubbly Paws, a dog grooming and retail business in Minneapolis. “Weekly, we have each of our store managers send us pictures of how the retail looks, and what’s going on. But you can only learn so much from pictures.”
That’s why it’s important to have a deep understanding of your inventory. It not only ensures accurate financial, accounting, and tax records, but it also leads to faster order fulfillment, fewer overstocks and stockouts, and happier customers. More frequent counts, called cycle counts, can prevent your inventory counts from getting out of hand, since you’re doing it more than once a year.
If you’re not already using cycle counting to keep your inventory accurate, here are some tips on how to get started.
How to improve inventory accuracy with cycle counting
Many companies conduct annual physical inventory counts using pencils and clipboards or through a bar code scanner that sends those details to a retail POS system. And while the approach sounds simple enough, you may also benefit from more frequent counts, particularly if you’ve had to make changes to your business.
Cycle counting involves counting specific sections of inventory (but not everything in stock) during a specified period of time. Like annual counts, the process can be handled manually, using automation, or a mix of the two. You can experiment with a different strategies, like only counting your necklaces and rings during one count, and then your bracelets and earrings in the next one. Or you could do an ABC cycle count, where you divide your inventory based on the sales brought in, investing more time counting the groups that bring in the majority of sales.
With cycle counting, the idea is that your entire inventory will be accurately accounted for during the course of a year. That means you can identify and address any discrepancies or errors as they surface during the individual cycle counts instead of waiting until the end of the year to do something about it. You also don’t have to shut down your operations to count inventory since you’re doing it on a smaller scale.
Cycle counting also leads to higher levels of inventory record accuracy, according to AccountingTools. This, in turn, translates into higher confidence in your final inventory valuation (i.e., how much your company’s total inventory is worth at a specific point in time). Over time, the need for full physical inventory counts diminishes because your records are accurate enough to eliminate the need for periodic physical verification.
What types of companies use cycle counting?
As a universally accepted inventory management practice, cycle counting is popular with businesses of all sizes and across most industries. Here are just a few examples of what it could look like.
An eCommerce business that would otherwise have to shut down its warehouse for a week (or more) to get an accurate tally of its current stock, for instance, can use cycle counting to perform that task on a rolling basis.
A clothing boutique with multiple locations can also benefit from cycle counting, whereby it would select a section of its warehouse, storeroom, or retail stores to count at any given time. Those tallies would then be recorded in an inventory management system, with the goal of counting the complete inventory over a specified period of time.
A small wine store that repeatedly finds itself out of stock on some of its more popular products can use cycle counting to gain more control over its procurement and fulfillment processes. When you know that a certain type of wine will be wildly popular during the summer months, you can adjust your order quantities based on the cycle counts.
Getting started: The cycle counting process
If you’re using cycle counting for the first time, here are four strategies to help you set up and orchestrate the process:
- Start by counting items in a designated area of your warehouse, stockroom, or retail store. Use your retail point-of-sale (POS) system to count a small, preselected section of inventory on a quarterly basis (or more frequently, if needed). Once the first section of inventory is counted, select a second area to focus on and then expand your efforts until all of the inventory in your facility is accounted for.
- Chart the actual workflow that you want to use. Document how the processes should work — right down to the individual tasks for every team, department, or area of your store (like procurement, receiving, stocking, order processing, etc.). The workflow might include completing and processing paperwork or sending the data directly to your POS system.
- With your first cycle count under your belt, identify and fix any inventory accuracy issues before moving to the next control group. To come up with a good cadence for cycle counting, factor in the number of SKUs that should be tallied within a year’s time and then work backward to come up with a daily, weekly, or monthly number of SKUs to count.
- Rotate your control groups. Use a control group that comprises a cross section of your inventory, and then count that group and compare it against the data that’s in your inventory management system. Finally, rotate your control groups based on a specific schedule to ensure that all SKUs in stock are counted at least once a year.
How to have accurate inventory year-round
Whether you use full, annual inventory counts or cycle counting, it’s essential to know how much stock you have on hand, which items are gathering dust on warehouse shelves, and which should be replenished more frequently.
Where annual physical inventory counts might require you to close your store, interrupt fulfillment processes, and take a week or more to complete, cycle counting is a perpetual process that can give you an accurate reflection of your inventory year-round.
See how Square for Retail’s new inventory counting tool can make your cycle counts more efficient.