Inventory cycle count: Definition & IRA formula
25 Sep 2021
Cycle counting is an essential tool when it comes to ensuring accuracy in inventory management. It helps to estimate the accuracy between the physical inventory and accounting recordings.
What is inventory cycle counting?
Cycle counting refers to counting inventory in small volumes each day to count the entire inventory over a specific period. Inventory cycle counts aim to ensure that the actual inventory levels match the inventory balance in accounting recordings. When there are errors during counts, the adjustments are necessary in the accounting books accordingly.
If planned and performed effectively, this inventory audit task will reduce transaction errors and improvements in recording accuracy without distracting the employees’ from their core tasks.
Inventory recording accuracy formula
Inventory record accuracy metric is useful to assess the level of discrepancies between inventory recordings and actual inventory.
The goal is to understand a company’s performance by comparing it to the past results, planned figures, and available industry benchmarks.
You can calculate inventory accuracy either from the point of stock costs (dollars) or numbers (units).
The following formula calculates inventory recording accuracy (IRA):
IRA = ( 1- the sum of the absolute variance / the sum of the total inventory ) x 100%
For example, during a cycle count, the warehouse manager calculated 430 stock units available. The accounting system shows that the balance of that stock was 480 units.
So, using the inventory recording accuracy formula we get the following:
IRA = (1 – (480 – 430) / 480) x 100% = 89.5%
Usually, it is reasonable to have an accuracy of more than 90%. However, companies should always strive for absolute, 100% accuracy.
Things to consider in cycle count planning
There are three key factors to consider when planning an inventory cycle count program.
The number of products or SKUs:
The first thing to determine is the number of products or stock-keeping units that you want to check in one count. For setting that number, consider the total of inventory volumes, the number of valuable products, and reasonable time schedules of counts.
The counts are conducted by employees. So, you should consider the availability of the labor resource when planning the count. Because it is a relatively easy task and is usually set at the end of a working day. When assigning a cycle counting task, the most crucial factor to pay attention to is to ensure that the employee has no interest or stake in the accuracy of results. Otherwise, there is a high risk of fraud.
Frequency of counts
To decide the frequency of inventory cycle counts, you should first determine the number of SKUs that you want to count in a specific period. Then, divide the total number into days, weeks, etc. Pay attention to the fact that you might want to count high-value items often.
Inventory cycle counting process
The purpose of inventory counts is to ensure accuracy and eliminate errors. So, it is a reliable internal control process that can improve inventory management practices and results.
Let’s now discuss the process of inventory cycle counts step by step.
- Review the inventory recordings: Before starting an inventory cycle count, accountants should review the system’s inventory-related transactions and data entries. It is performed to ensure the accuracy and completeness of the inventory data in the accounting system.
- Prepare a cycle count report form: Make either an electronic or printed form of a report that the counter should use for checks.
- Start the physical count: Employees responsible for the count have to compare the quantities, descriptions, and other related stock data between the report and shelves. However, you may also choose to assign an employee to conduct a count in a specific location without giving them the system data, so they do not use it as a hint.
- Reconcile the data: After the responsible party receives the count results and system data, they should reconcile and identify errors.
- Adjust recordings: When mistakes are identified, procedures must be performed to find the roots and causes. After that, the errors should be corrected by adjusting the system recording with the actual storage data.
Benefits of cycle counts
A cycle count is an internal control method fot increasing the accuracy of an important business asset – inventory.
There are many ways that businesses benefit from cycle counts.
The key benefit is the increased accuracy of inventory recordings and actual stock. Compared to year-end inventory counts, there is no need to stop all business operations during the cycle counts because the planned volumes to count are not huge.
Because cycle counts help identify and correct errors in accounting systems, there will be less risk of identifying errors during external audits.
These are just some of the potential benefits of inventory cycle counts. Overall, cycle counts, as a control mechanism, make inventory management operations more efficient.
Automation in inventory management and cycle counts
By integrating an inventory management software like eSwap, businesses can automate many parts of inventory processes, which will strongly benefit them. Automation leads to accuracy in all aspects of the supply chain and business management.
During the cycle counts, automation can increase the level of accuracy of final results. It will also reduce labor costs and decrease the duration of each task. There will also be increased real-time visibility of inventory movements and changes.