Inventory accuracy is a key component of inventory management that affects a business’s success. Thus, maintaining up-to-date and accurate inventory records is of primary importance. There are various methods or approaches for inventory counting.
The two most common methods are physical inventory counting and cycle counting. Both these methods are the most popular and have advantages and disadvantages. Now, the question arises; physical inventory vs cycle counting, which among the two is the best? Let’s explore this together in this blog post!
What Is Physical Inventory Counting?
In simple terms, physical inventory counting is the process wherein employees physically count all the stocks in the inventory. It’s a systematic procedure that doesn’t involve machines for counting stock levels.
The main aim of this inventory counting method is to verify if the recorded inventory count matches that of the physical count. Moreover, it is also used to identify the root of discrepancies in inventory count.
Basically, there are four physical types of physical inventory counting. They are:
- Complete inventory count: Mostly done towards the end of a financial year, it involves counting all the items within the inventory. It’s done to ensure the inventory levels are accurate and match the count reflected in financial and tax reports.
- Partial inventory count: Unlike complete inventory count, this method involves counting only a small portion of the inventory at regular intervals. You may also understand it as regular inventory counting.
- ABC Analysis: In this method, all the inventory items are categorised into three groups based on their value. The most valuable and important items are regularly counted, and vice versa.
- Blind inventory count: In this method, the recorded inventory count is kept concealed from the employees involved in physical counting. This ensures that the employees are unbiased, leading to accurate counts.
Physical inventory counting is a great way of verifying inventory accuracy. It’s also used to identify thefts, damaged products, and other discrepancies at the earliest. It also helps properly utilise business resources, thus ensuring profitability.
However, as it involves maximum human involvement, it’s time-consuming and prone to human errors. Moreover, the data is valid for only a period of time due to regular inventory movements.
What Is Cycle Counting?
In cycle counting, you don’t need to count your entire inventory in one go in a single day. Instead, you’ll have to divide your entire inventory into small parts and then conduct regular counts for each of those parts. It’s less disruptive and time-saving. Moreover, due to regularity in counts, the accuracy and longevity of the record are also high.
It reduces the need for physical counting. Moreover, it offers real-time visibility into the supply chain and inventory movements. Besides accuracy and productivity, it also helps in identifying discrepancies early, thus promoting their resolution in a timely manner. It’s time-saving and reduces labor costs to a great extent.
However, setting up is quite complex and requires careful planning and execution. Not just this, as the inventory is counted part by part, the coverage in each count is also limited.
Key Differences between Physical Inventory and Cycle Counting
We’ve already looked into each of these methods individually. Now, before deciding the best one between the two, we should first understand the underlying differences between the two.
1. Items Counted
In physical inventory counting, employees physically count all the stocks in the inventory in one go. Whereas in cycle counting, only a part of the inventory is counted in one go.
2. Involvement of employees
Physical inventory counting involves employees’ full attention and efforts as it’s performed on a large scale. However, cycle counting doesn’t require all employees to be entirely dedicated to the process.
3. Complexity
Compared to cycle counting, physical inventory counting is more complex, cumbersome, and time-consuming. Moreover, it is done towards the end of a financial year, unlike cycle counting, which is less complex as it’s done regularly.
4. Inventory Freeze
During physical inventory counting, the entire warehouse and inventory must be freezed to ensure that inventory movements don’t affect stock counts. Whereas, in cycle counts, only the part of the inventory whose cycle count is being conducted needs to freeze its inventory. Other parts of the inventory will function as usual.
5. Disruptions
As physical inventory counting affects day to day to day business operations, it’s quite disruptive. Moreover, it requires the complete involvement of the employees, which is why it’s time-consuming and labor-consuming. But cycle counting is performed at a small scale which is why it isn’t much time-consuming.
6. Flexibility
Physical inventory counting has less flexibility since it has a starting and end point and must be carried out chronologically and systematically. On the contrary, in cycle counting, you can decide where you want to start and which order you will follow. Thus, it offers much more flexibility in comparison to physical inventory counting.
7. Accuracy
In terms of accuracy, cycle counting wins the race as it’s performed regularly on a small scale without disrupting regular inventory movements. But, physical inventory counting is done rigorously only at the end of a financial year, which is why it’s inaccurate.
8. Suitability
Physical inventory counting is ideal for small-scale businesses that have small inventory as counting bulk inventory at one go sounds impossible for a large inventory. However, cycle counting is perfect for small, medium, and large-scale businesses.
Both physical inventory and cycle counting have their own individual advantages and disadvantages. They do have some underlying differences between them. You may choose the best one suited for your business based on your requirements.
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FAQs: Physical Inventory vs Cycle Counting
1. What is physical inventory counting?
Physical inventory counting is the process wherein employees physically count all the stocks in the inventory.
2. List the advantages of physical inventory counting.
Physical inventory counting is a great way of verifying inventory accuracy. It’s also used to identify thefts, damaged products, and other discrepancies at the earliest. It also helps properly utilize business resources, thus ensuring profitability.
3. What is cycle counting?
In cycle counting, only a part of the inventory is counted in one go. The entire inventory is divided into small parts, and then regular counts are conducted for each.
4. List the advantages of cycle counting.
Cycle counting reduces the need for physical counting. Moreover, it offers real-time visibility into the supply chain and inventory movements. It also helps identify discrepancies early, thus promoting their resolution in a timely manner. It’s time-saving and reduces labor costs to a great extent.
5. Physical inventory vs cycle counting: Which is the best?
Both physical inventory and cycle counting have their own individual advantages and disadvantages. You may choose the best one suited for your business based on your requirements.
Wrapping Up
The two inventory counting methods: physical inventory and cycle counting, are best in their own ways. However, we suggest you go for cycle counting because it keeps you updated with your inventory. It also promotes better inventory management. Moreover, you don’t need to worry about switching inventory counting methods when you scale your business. In fact, scaling your business is much easier with cycle counting.
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