If you are a small business retailer, you know that monitoring your warehouses is an integral part of small business inventory management. It is important that you audit your stocks regularly, make sure the goods are stored in proper conditions and that the item count matches the entries in your inventory management system.
The Problems of Product Counting
But what is the best way to do product counts? Most of the times, businesses have such a large diversity and quantity of merchandise that it becomes impossible to count everything in a single run, at least without closing. That’s why many business owners choose to perform only one physical count to the entire inventory, at the end of the fiscal year.
However, a single count does not reveal potential problems that could be detected and solved as soon as they surface. Inventory leaks could be hurting your stocks throughout the whole year, and you will miss this if you only check them at the year’s end.
This could happen due to theft, delivery issues, or problems with SKU entries in the POS system, either due to a human error or a system error (think about upgrading your inventory management system).
The problem is if a physical count of the entire inventory across multiple warehouses is such an arduous process, how are you supposed to perform one multiple time a year? Well, that’s why cycle counts exist.
Introducing Cycle Counts
Cycle counting is a common practice in small business inventory management where you count a portion of your inventory one time per cycle. Each cycle is a defined period of time, usually a month. This helps businesses spot inventory problems right at birth and fix them right away, if possible. And since you are only counting a portion of the inventory, the idea is that you can do it without closing down the business and losing money. Preferably, you should do it in a couple of hours after closing or, with proper organization, even during business hours.
There are essentially two types of cycle counts: product-based and location-based. In a product-based count, you go through every location and do the count for a single good or part. At the end, you get a total count of that product that you can check against the inventory records.
In a location-based count, you visit each storage location when its time comes and do a full product count. This method complements the first one and may help find products that were deemed lost during a location-based count. Ideally, successful small business inventory management requires you to implement both types of cycle counts.
Even if cycle counting allows you to perform regular audits of your stocks, it does not mean you can do it blindly. In order for it to be truly helpful, you should follow some criteria to help you decide when to audit each type of product. There are several ways to approach this.
Cycle Counts Based on ABC Analysis
The goal of an ABC Analysis is to divide your merchandise into 3 different categories: A, B, and C, based on their value to the company. Following Pareto’s principle, it is generally observed that merely 20 percent of a business’ merchandise is responsible for 80 percent of the profit. Those 20 percent are the A-type products.
As you can imagine, it is more important to maintain high inventory accuracy for A products, so cycle counts should be performed more often for this type than for B and C types.
Cycle Counts Based on Seasonality
Besides from the ABC analysis, you should also consider products that only sell on certain times of the year. For example, if warm jackets sell primarily during winter that is the time to audit them, in order to detect and fix potential errors on time.
Even if you choose not to follow the two approaches mentioned here, it is important that you have a system, no matter what it is, and stick to it. For example, you can divide your warehouse into several portions and audit one portion per cycle, always following the same order. Having a system minimizes human mistakes.
Of course, it is extremely helpful to complement cycle counting with a reliable inventory management software. It helps minimize inventory errors in the first place, and also makes it easier to compare the physical count with the digital records. This is because the inventory management system keeps your data up-to-date in real time and allows you to access it even from a mobile terminal.