Cycle counting

What it means

Cycle counting means physically counting inventory in parts throughout the year instead of in one big stocktake. The warehouse is divided into groups, such as by rack or product category, and a different part is counted each week or month, so every item is covered over the year.

The Accounting Act allows the stocktaking of inventory to take place during the year if the company keeps reliable stock records and correctly reflects any differences at the reporting date. Without dependable records, cycle counting has nothing to rest on.

It is often combined with ABC analysis: expensive and fast-moving items are counted more often, cheap and slow-moving materials less often. Operations do not have to stop for several days, and errors in the records are spotted sooner rather than only at year end.

How it works in practice

Each count is recorded in an inventory list with the date, the names of those involved and the quantities found. Any stocktaking differences are compared with the records, explained and booked so that stock levels match reality.

During a count it is important to capture movements happening at the same time. Goods received or issued during the count must be clearly assigned to before or after it, otherwise artificial differences arise. Many warehouses therefore briefly freeze the zone being counted.

Recurring differences on the same items point to a systemic problem such as picking errors, wrong units or theft. Cycle counting helps find the cause sooner and distinguish normal shortages within allowances from losses that must be settled with the responsible person.

What to watch out for

Cycle counting does not mean nothing needs doing at the reporting date. The inventory balance at the balance sheet date must be supported, so the company rolls movements forward from the last count and, where in doubt, rechecks selected items.

For tax purposes, shortages above the allowance for natural losses are generally not deductible unless they are losses caused by an unknown perpetrator and confirmed by the police. VAT payers must also consider adjusting input VAT deducted on missing goods.