A Simple Guide to Cycle Counting in Retail (+ Best Practices & Benefits)

Cycle counts

Cycle counts are a vital part of inventory management to prevent stockouts and theft, and maintain low inventory holding costs

In this article you’ll learn the benefits of cycle counting, the types of inventory cycle counts, and how to get started with cycle counting in your store.

What is a cycle count?

Inventory cycle counts involve counting a small group of products at a specific time without having to disrupt business operations. 

Cycle counts are a process retailers use to count specific groups of products on a regular basis to increase inventory accuracy and uncover and solve discrepancies in less time than a full physical inventory count. 

By doing frequent cycle counts you can identify the causes of inventory errors and make a plan to resolve them. And over time, you will have counted all your stock without disrupting your retail store operations. 

Physical counting vs. cycle counting 

Physical counting involves counting all your inventory at once a few times a year. Cycle counting involves counting a small amount of inventory in phases, on a regular basis (sometimes daily).

Counting inventory

Physical inventory counts are more disruptive making it a better choice if you have fewer products and can count all your stock without closing your store for the day. But it’s also not as accurate as cycle counts because you’re not auditing inventory on a regular basis. 

Cycle counting is generally more accurate because you’re constantly reviewing your inventory, reconciling differences, and resolving issues as they come up. It’s also less time consuming—rather than counting all your stock at once, cycle counting lets you count inventory in batches over time.

If you’re constantly running into discrepancies during cycle counts, you may want to consider doing a full physical count for reconciliation and then resume cycle counting. 

Benefits of cycle counting

There are three main benefits of inventory cycle counting: 

  • Identify inventory discrepancies
  • Make inventory counting more manageable
  • More accurate inventory data

Identify inventory discrepancies

Regularly counting batches of stock will help you pinpoint errors in your inventory counts and resolve them faster than only doing physical counts once or twice a year.

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Make inventory counting more manageable

Counting smaller amounts of inventory more frequently makes the counting process easier and less time consuming, and doesn’t disturb your retail operations. This way, you’ll maintain inventory accuracy without having to close your doors and miss out on potential sales. 

More accurate inventory data

Routine counts lead to more accurate numbers and the ability to quickly identify theft or other issues causing discrepancies in your inventory. More accurate inventory data can help prevent you from over- or under-buying stock.

PRO TIP: Try implementing RFID technology to increase the accuracy of your inventory data and reduce cycle count time. Learn more by reading our post: What Is RFID Technology and How Can I Use It?

Types of cycle counting

Here are some tips for each of these cycle count techniques.

ABC cycle counting 

The ABC cycle counting method uses the Pareto principle, also known as the 80/20 rule—80% of your results come from counting 20% of your products. 

If counting a random sampling of inventory doesn’t sound right for your business, you may prefer this method. Focus on the products providing most of your results by separating inventory into A, B, and C categories. 

Here’s how you can figure out which products go in each category: 

Category A

  • High profit margin or high sales volume products that account for 80% of your revenue, but only about 10% of your total inventory. 
  • Counted monthly. 

Category B

  • Average to high profit margin or sales volume products that account for 15% of your revenue and roughly 20% of your total inventory. 
  • Counted quarterly.

Category C

  • Low value and low-demand products that account for just 5% of revenue, but roughly 80% of your total inventory. 
  • Counted once or twice a year. 

Once you’ve sorted all products into categories, you can start cycle counting. To boost accuracy, count category A products frequently, and category B and C products periodically. 

Potential disadvantages of ABC cycle counts are: 

  • If you have many unique products (with low inventory), you might count them too often. 
  • Products in group C may not get counted often enough for an accurate inventory count.

But if you’re aware of these downsides, you can mitigate them by planning your ABC counts accordingly.

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Random sample cycle counting

If your products are similar, random sample cycle counting is a good option. With this method, you can choose a random number of products to count during each cycle count.

Warehouse with inventory

The advantage is fewer disruptions either to your warehouse or retail store, as random cycle counts can happen during normal business hours. 

Random sample counting has two approaches: 

  • Constant population counting. The same number of products are counted every time. Some products may not be counted at all while others are counted frequently due to a random selection process. 
  • Diminished population counting. Once products are counted, they are excluded from future cycle counts until all inventory has been counted. Then the process begins again. 

These random sample counting techniques are both effective, so choose the one that works best for your business.

Control group cycle counting

This cycle counting process involves focusing on a small group of products and counting them repeatedly in a short period of time.

Creating a control group uncovers errors in your counting technique, so you can fix them before counting larger groups of products.

If you’re new to cycle counting, this method is a great way to start. It lets you practice and refine your process before you apply it on a bigger scale. 

How to do a cycle count 

  1. Review inventory records
  2. Set accuracy level targets
  3. Start count
  4. Reconcile differences
  5. Implement necessary procedures
  6. Adjust inventory records
  7. Calculate inventory accuracy levels
  8. Repeat cycle

Once you’ve assigned dedicated store staff to cycle counting, make a plan to document the cycle counting process, and close out all transactions before you start counting. 

Then you can begin the cycle count process.

Review inventory records

To start out on the right foot with counting cycles, it’s important to make sure the inventory quantities in your POS system are up to date and any outstanding discrepancies are reconciled.

Set accuracy level targets

You’ll want to aim for 100% inventory accuracy, but that’s not always possible. Generally, 90% accuracy or higher is a good goal. To determine inventory record accuracy (IRA), use the inventory cycle count accuracy formula. 

IRA = 1 - (the sum of the discrepancy / # the sum of the total inventory) x 100

For example, if your inventory management system is showing you have 150 units of a particular product and you count 148 units, there is a two-unit discrepancy, and your IRA is 98.7%. 

Here’s the math: 

98.7% = 1 - (2/150) x 100

Use this KPI to set, track, and improve your inventory accuracy levels. 

Start count

Whether it’s you or a dedicated counter, review the inventory descriptions, locations, and quantities from your records (or inventory report) and then compare them to what’s physically on your sales floor and in your stock room and/or warehouse. 

Counting tips: 

  • Close out all transactions before counting. 
  • Count categories one by one to increase efficiency and avoid errors. 
  • Vary your counting schedule to prevent employees from manipulating the system.
  • Consider seasonality of categories, so you’re counting products when they’re in demand and you can fix discrepancies quickly.
  • Do cycle counts frequently and always double-check them.

Reconcile differences

Pinpoint the inventory differences found during cycle counts and reconcile them in your system and with your staff that manages inventory. It’s vital to recognize if there are patterns in inventory discrepancies. 

Implement necessary procedures

If the same issues keep coming up regularly, you may need to set up new inventory counting processes or fix the holes in your approach. And if it’s not your cycle counting procedure that’s at fault, what else can you fix?

Are you losing inventory due to shopper or employee theft? If so, you could hire more security personnel or install surveillance cameras to mitigate these issues. 

Adjust inventory records

Once you’ve completed cycle counts, include a step in your process to update your inventory management system to reflect your physical inventory. 

Calculate inventory accuracy levels

Use the formula given above to calculate your inventory accuracy levels. If it’s coming up below 90% most of the time, you’ll want to implement strategies to improve accuracy. 

Repeat cycle

Repeat the cycle counting process on a regular basis. Depending on your business, you may choose to do it daily, weekly, monthly, or quarterly. However, cycle counts are generally more accurate the more often you do them. 

Could your store benefit from cycle counting?

Cycle counting makes inventory management and reconciliation less of an undertaking, since you can focus on smaller chunks of product, spend less time doing it, and avoid having to close your shop doors (and potentially miss out on sales).

Manage inventory from one back office

Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

Cycle Counting in Retail FAQ

How does cycle counting work?

Cycle counting is a form of inventory management in which a company counts a portion of its inventory on a regular basis instead of counting it all at once. This allows the company to keep a more accurate count of their inventory, as well as identify and address issues with their inventory management system. Cycle counting consists of counting a number of items within a specific time frame, typically a week or a month, and then comparing the results against the company's system of record. If discrepancies are found, the company can address any issues that may be causing the discrepancies.

What are the three types of cycle counts?

  • Full Cycle Count: A full cycle count is a comprehensive physical inventory of all items in a warehouse or storage facility. This type of inventory is usually done annually or semi-annually and requires significant amounts of time and resources.
  • Spot Check Cycle Count: A spot check cycle count is a physical inventory of a selection of items in a warehouse or storage facility. This type of inventory is typically done more frequently than a full cycle count and requires fewer resources.
  • Partial Cycle Count: A partial cycle count is a physical inventory of a subset of items in a warehouse or storage facility. This type of inventory is usually done on a weekly or monthly basis and requires fewer resources than a full or spot check cycle count.

What is the difference between physical inventory and cycle counting?

Physical inventory is a complete count of all the items in a warehouse or store in order to determine the exact quantity of inventory on hand. Cycle counting is a method of inventory control that involves counting a small number of items from the inventory on a regular basis. Cycle counting allows for more frequent and accurate inventory updates, and can be used to detect discrepancies in the inventory count.