by: Raymond Chang, CPA
Every business owner who sells tangible goods must undergo the often expensive, disruptive and time-consuming headache of taking a full year-end physical inventory. A full physical usually requires extensive coordination with warehouse staff and your CPA firm.
During this time your business grinds to a halt with much of your resources devoted to counting your inventory.
A full inventory is important, reliable and familiar to many. You need to know what you have, not what you thought you had. You also need to know what items are gathering dust and how much precious space these slow moving goods are taking up in your warehouse.
But what if there was a different method that doesn’t disrupt daily business and could potentially save owners both significant time and money? Consider cycle counting. Instead of counting everything at year-end, you count everything throughout the year, but more frequently.
The key is leveraging off your perpetual inventory system in tracking movement of your goods in terms of usage and sales over a period of time, unlike a periodic inventory system where movement is not tracked.
Quantify your past inventory movement history between high, little to no movement, and also those in between that are slow moving and new items. Quantifying your inventory movements allows you to be strategic in your other business decisions such as balancing your resources to manage your on-hand stock and gives you time to address slow to no moving stock.
Once your inventory movement is quantified, you can leverage your resources accordingly. Consider counting low to no movement items once during the year. For both fast-moving and slow moving inventory, adjusting your count frequency accordingly. Perhaps four to six times per year for fast-moving inventory, and two to three times per year for slow movers and new items. A review of past adjustments may also be a good indication of the ideal balance for your business.
Identifying your slow moving inventories gives you the opportunity to also better manage them. Sell them at a discount, change production so that they can still be useful, or dispose of them and take a tax deduction.
Cycle counting can and should be performed in conjunction with the company’s daily operations and therefore is less disruptive than a year-end physical inventory. It will also increase the accuracy of your perpetual inventory system. A more accurate perpetual inventory is a real strategic asset to your business operations in minimizing excess inventory and balancing your resources.
If you’d like more information about “cycle counting” to see if it would benefit your business, please contact Raymond Chang at firstname.lastname@example.org.