Inventory is a major asset in a business, as it ties up considerable cash that could be used for other purposes.
For this reason, good inventory management is a must. What is good inventory management? Essentially, it is a balance between over-stocking and under-stocking – that is, stocking sufficient materials to fill customer orders without having too much or too little inventory.
Good inventory management also requires verification of the numbers and values of inventory accounts in your general ledger. Timely recording of all changes in inventory, such as receipts and usage, is important in this process. Physically counting inventory is the only way to do this, and there are two ways to do inventory counts: “year end” inventory counts and cycle counts.
Counting your inventory once a year is both a labor- and time-intensive process, so more and more companies are migrating to a cycle counting system.
Cycle counting involves counting small amounts of items each day or each week, thus spreading the counting of physical inventory over the year into smaller, more manageable, and less time-consuming chunks.
Here is a short list of things to consider when planning a cycle count:
Procedures and Training
A well thought out, written procedure and good training for all employees will prevent confusion in how to do the process.
In addition, the accounting department should oversee the cycle count rather than purchasing or the warehouse in order to eliminate a conflict of interest.
Good Software
Quality software will allow you to set criteria for making random item selections and printing out count lists. Schedule it to select items of high value or items that are more prone to shrinkage several times during the year.
Blind Counts
Do not reveal the inventory amounts in the general ledger on the list of items to be counted, as it will make those doing the counting less biased.
Variances
All variations in item counts should be verified and the cause of the variation should be investigated. Were there counting errors? Was inventory misplaced? Did the inventory get stolen somehow?
Investigating and accounting for variances in inventory will reveal areas for improvement in inventory process and management. Inventory process and management improvement will, in turn, make cycle counts go smoother.
Adjustments
If inventory adjustments are required, make entries to the correct accounts – not all adjustments belong in cost of sales.
Cycle counting is a less painful way to keep track of your inventory, and good inventory management software can help even more. If you’re looking for an easier way, let Oates & Company assess your inventory process and select the right software for your needs. Contact us with your questions.
