Retail business inventory refers to furnished goods or products a retail owner holds for selling to customers. This inventory is mostly in the store, warehouse, or at other store locations (in the case of multi-store retailers). Retailers need to ensure that their inventory at all locations and warehouses (also in transit) is counted regularly. This is done to avoid a mismatch between inventory records (what your manual registers or inventory dashboard shows) and the actual inventory that you hold. Without regular stock counting, you will never find if any stock is missing, stolen, or damaged that’s why cycle counting retail inventory is very important for every retailer.

Now, there are two processes for counting inventory: annual inventory count or yearly stock verification and the other is cycle counting. 

Annual counting means you count your inventory and verify it once a year. This is mostly done for audit purposes. Another method is cycle counting, which means regularly counting a small portion of your inventory at fixed intervals for example, weekly, fortnightly, monthly, or quarterly). 

Cycle counting is done primarily for maintaining stock accuracy rather than for yearly compliance purposes.  Regular counting ensures you can fulfill customer orders without fail and any missing stock can be identified quickly. 

This article will detail what is cycle counting inventory. why is it important? how is it done, and what are the best practices? 

What is Cycle Counting? 

Suppose as a Gift Shop retailer you also run an online store for selling your products. You get an order for 15 wallets online. Your online records show that you have 15 wallets available in stock (10 in your store, and 5 at your other gift shop branch). Now, when you go to the other store, you find only 4 wallets there. One wallet is missing from the store while the online inventory records show them. 

This can happen due to multiple reasons like: 

• Theft
• Mishandling
• An extra wallet being put in the shopping bag of any customer by mistake
• You received one wallet less from the supplier but you counted it wrong at the time of delivery
• One wallet was given to any relative or friend visiting the store but you forgot to bill it.

and many more. 

However, you are now in a fix as to how you will fulfill the order. Also, if the customer has ordered 15 for say giving to their staff members, they will need the exact type and brand. It will be difficult for you to quickly reorder the same type or color, etc. You will either have to cancel the order or face embarrassment by delivering short. 

This example shows the importance of regularly keeping a tab of your physical inventory and tallying it with the inventory registers. This is what cycle counting is all about. It saves you from embarrassing situations like the above. 

Cycle Counting is the process of regularly counting your inventory (a fixed cycle: weekly, monthly, quarterly, 20 days, 45 days, etc.). This is done to match the physical inventory with inventory records (manual registers or inventory software records). Inventory is broken into small portions to count regularly. 

One more advantage of cycle counting inventory apart from sparing you the embarrassment is that it breaks down counting for you. It is difficult for large retailers to conduct a physical inventory audit yearly owing to large stock counts. Cycle counting is a solution to this. The cycle counting process can be applied to regularly count a small part of the inventory and match it with the existing physical inventory record. It is a recurring cycle of counting to avoid huge audits or annual stock verification altogether and get your inventory accounted for in small chunks and regular timeframes. 

Most Popular Cycle Counting Methods

#1 ABC Cycle Counting 

ABC analysis method of cycle counting works by dividing the inventory into three groups based on prices and sales contribution. The categories are:

• Class A item: Best-selling item with faster movement 
• Class B item: Seasonal sales items with frequency below Class A 
• Class C item: Slowest-selling items 

Categorizing the items helps you accurately count products during the process. For example, if you are the owner of an apparel store, you will classify as:

1. Class A items: are sold very frequently. (Example: Casual T-shirts)
2. Class B items: are sold during seasonal demand. (Example: winter coats and jackets)
3. Class C items: are sold rarely, once or twice annually. (Example: wedding gowns or party dress)

Did you Know? ABC Cycle Counting is also known as Pareto Analysis as it is based on the principles given by the famous Italian Economist Vilfredo Pareto.

It follows the 80-20 rule in Pareto analysis.  According to this rule, inventory can enhance working capital and better align inventory with customer demand. It also aids in optimizing the 20% of products with the best margins for volume and profitability.

The items that sell more frequently (Class A) are cycle counted more frequently, say Weekly or Fortnightly. Items that sell less (Class C) can be cycle-counted quarterly. 

ABC Cycle Counting in Action

Example of ABC cycle counting:

Suppose a fashion retailer has 168000 items in the store and warehouse. The defined ABC category for its inventory are: 

Class A items = 90000

Class B items = 60000 

Class C items = 18000

Total Items=170000

The retailer’s policy is to count Class A items Fortnightly (15 days), Class B items every month (30 days), and Class C items Quarterly (90 days).

Calculate the number of counts required per day for ABC Analysis: 

Item Class	Quantity	Counting Frequency	Counts Required per Day	Average Counts Required Per Day
Class A	90000	Fortnightly	90000/15	6000
Class B	60000	Monthly	60000/30	2000
Class C	18000	Quarterly	18000/90	200
Total Items	168000
This is how by breaking the inventory into three categories and then counting around 8000 stocks a day, the retailer can not only verify physical stocks with inventory records but also reduce the burden of inventory counting.

#2 Random Sampling

The random sampling process for retail cycle counting is for retailers with very large warehouses (like supermarkets, or hypermarkets) where you have a stock of similar products. The system will randomly select a group of items for counting. Once the counting of a product is over, we remove it from the list, and another product counting starts. The process continues until the counting of all the selected items is over. Next, the entire process begins again. This method identifies discrepancies in inventory records, monitors trends, and maintains inventory accuracy over time. 

#3 Control Group

In the Control group process for retail cycle counting, a small group of products are counted repeatedly that you monitor often. You have to count the products multiple times to minimize errors. It helps you identify the errors within the process so that you resolve them before applying them to the entire inventory. 

How to Prepare for Efficient and Error-Free Cycle Counts in Retail Stores? 

Accurate results of the cycle counting process depend upon the methods you choose. Hence, you have to follow it step by step:

1. Plan for routine cycle counting:

Before you start cycle counting in retail stores, set your goals. Look for:

• What kind of items will be counted?
• How often do you count them?
• How will you cycle count products monthly or weekly?

Identify the items for the cycle counting process and repeat the process until you get satisfactory results. Before counting, have a look at your existing inventory.

2. Assign cycle counting 

You have to assign people from your staff who are familiar with the product and can calculate accurately. You can do this process alone if you own a small retail store. However, if you have branches or a big retail store,  you can lead the team. Your team member should know their job responsibilities, where goods are kept, and can use the inventory tools effectively.

3. Verify results with inventory data

Once the counting is over, it is time to verify the results with registers or dashboard count. There should be no chance for human error. It is better to double-check your results for the accurate count because inaccurate counting causes a business interruption in the future, such as a shortage of stock or a product running out of stock.

4. Identify discrepancies

If the physical inventory does not match the existing inventory, dig deep and find the source of this mismatch. Do not be surprised if your cycle count process reveals other inventory mismanagement issues. 

Some common errors are:

• Inaccurate count due to human error
• Wrong data entry
• Unsystematic warehouse
• Stolen items
• Missing items
• Wrong locations

5. Update inventory data

If all goes well, the cycle count inventory will match the physical inventory, and there is no chance of error. But if there is a mismatch, your next step is to make the required changes in inventory data. Learn more about better Inventory management techniques and best practices to make necessary changes in your stock management process and reduce the likelihood of errors during future cycle counting in retail stores. 

Best Practices for Improving Inventory Accuracy in Retail Business
Count your Inventory Regularly	Monitor your sales	Develop a return process	Use Inventory management software
Regular inventory counts are the most effective technique to ensure accuracy.	The Smart retailer knows the ups and downs of the market and is aware of the things sold during a particular time.	Without a clear return policy, you may be at risk of unsold inventory and ignore a chance to exchange products in response to return products.	As the business grows, you have greater responsibilities and less time to manage inventory.
When we calculate stock counts, we also consider damage, inventory shrinking, and product returns.	Retailers should regularly update their inventory to ensure the products are available on specific days.	Check the returned product and identify the reason for the return. Get it updated in inventory.	It can increase the chances of human error and may lead to overstock or out-of-stock situations.
Aware retailers who cycle count are more compliant with stock verification needs and less prone to inventory inaccuracies.	Observe market demand and keep restocking for the future.	Better return policies will ensure your inventory records are updated with returned goods.	All these can be dealt with efficiently by using an inventory management tool.

Advantages of Cycle Counting Retail Inventory 

The main objective of cycle count is to identify, acknowledge, and rectify inventory inaccuracies. The benefits of cycle counting are immense for retailers of all sizes and business verticals. 

1. Identifying inventory loss

The inventory loss occurs during the purchase and sale of the product. It includes theft, warehouse theft, employee fraud, or error at the management level. The cycle count process can detect such shrinkages by identifying the mismatch of numbers between physical counts and recorded inventory cycle counts. For instance, poor labeling can also confuse. Using advanced barcode and labeling software can help in creating high-quality labels. 

2. Fraud Prevention

Since the staff knows inventory is monitored regularly through cycle counting, they get discouraged from any theft or fraud within the store. The employees will remain honest as they know any misconduct will lead to their job suspension. Any other theft attempt will also come quickly into consideration. 

3. Quick Response to Discrepancies

Cycle counting enables retailers to respond quickly to inventory irregularities. If any discrepancies are found, you can immediately identify the source and take action to resolve concerns. They may arise due to theft, fraud, or administrative faults.

4. Less Burden

Cycle counting is less burdensome as you can keep counting smaller units regularly. Therefore, it requires less time and can be included as a daily activity with a short duration. 

5. Saves Time and Cost

The traditional inventory audit is time-consuming, gives headaches, and the store has to shut down to get the exact audit results. Retailers can update their inventory records without closing the business or working overtime. It allows you to run the store and control inventory accurately.

How is Cycle Counting Inventory Different From Inventory Cycle? 

(Understand the difference between the Often confused terms) 

Retailers need to precisely maintain inventory and observe how these products will sell in a specific timeframe. Faulty or manual processes in inventory management can lead to mismanagement and stock losses. This is where retailers need two things: a well-manged inventory cycle and a method to count inventory. 

The inventory cycle is often confused with cycle counting inventory. However, both are different. 

The inventory cycle is the calculation of the time a retail store takes to sell its inventory soon after receiving it from the supplier. 

The inventory cycle can help you to optimize inventory records of selling and stocking products. It prevents stockout and overstock situations, reduces carrying costs, and increases profit. It usually depends upon the business sector, product type, and marketing practices.

Let us understand by an example-

You own a small boutique clothing store. You had 1000 dresses at the beginning of the month. You sold 500 dresses within a month. Before the month’s end, you order 500 more dresses to replenish your stock.

• Beginning Inventory: 1000 dresses
• Dresses Sold: 500 dresses
• Ending Inventory: 500 dresses

In the above example, your inventory cycle is of one month. This means, you as a boutique store retailer, take 30 days to sell the stock of 500 dresses that you received from the supplier. 

Formula: 

Number of stocks/number of days to sell the stock 

It is the inventory cycle of one month, where it takes one month to sell and replace your inventory of dresses. Your inventory cycle can be in days, monthly, quarterly, or half-yearly, depending on the stocks and sales of your products. 

Aspect	Inventory Cycle	Cycle Counting
Focus	Movement of goods within the supply chain	Regular counting of inventory items at intervals
Purpose	To manage the time it takes to sell a stock after receiving from suppliers	To maintain day-to-day stock record accuracy and identify inventory record errors
Disruption Level	Integral to supply chain operations and can disrupt the supply chain flow	Generally less disruptive to the supply chain but more disruptive to day-to-day operations
Frequency	Depends on business types	Occurs regularly at specific intervals throughout the year irrespective of business type
Scope	Covers the entire flow of goods within the supply chain	Focuses on maintaining day-to-day accuracy of inventory
Examples	Ordering, receiving, storing, and selling products	Regular counting of a subset of items like clothes, fashion accessories, gift items, etc.

Conclusion

Nowadays most retailers use retail software to record, manage, and systemize their inventory. Inventory records from all store branches are visible on a dashboard with just one click. However, sometimes these records may not match with the actual physical stocks present in the retail store branches or warehouse. Inventory counting is essential to find the discrepancy if any. Cycle counting is one of the best methods for inventory record accuracy (IRA) that identifies and corrects inventory record errors. VasyERP POS Software ensures more accurate inventory counts with its modules for inventory management, barcode generation, stock verification, stock categorization, product variants, and more. 

VasyERP helps in cycle counting and verifying inventory using a mobile app-based stock verification process. This allows users to scan barcodes efficiently to identify and match physical stocks with their digital records. VasyERP eases your burden of updating and managing inventory, making cycle counting super easy for you.