Before we get into why the cycle count is important, let’s reiterate an important set of conditions: Any item that comes into your warehouse should be accounted for in your accounting system through an item receipt or bill, every time. Also, every item that leaves your warehouse should be accounted for by a sales transaction. So, nothing comes in or goes out without being logged in your accounting system.
Now, about the inventory. Once you’ve done your full physical count, how do you know that your count is accurate? Conducting a monthly cycle count means re-counting the top 10 percent highest volume, quickest selling items to reveal any discrepancies between the counting system and what’s physically on your shelves (or any breakdowns in workflow) so the system can be corrected immediately.
Because of your stellar logging system, you can narrow down the problem and the time frame fairly easily: You know that within the month, either something came into your warehouse without being recorded or something left without it being recorded. There are only two reasons why things would leave without being recorded—you sent something without recording a sales transaction (which means your accounting is going to be off), or someone’s walking off with your goods. Either of those scenarios stinks.
It’s also not ideal if you have more items on the shelf than your accounting system says. That means that within the month, you might’ve had a bad physical count and maybe you found a box that just appeared from somewhere. This could also mean you received items and didn’t actually record them in your accounting system.
Regardless, when a monthly cycle count is off, it’s because transactions are not being recorded properly or something’s happening with the stock that’s not being recorded. Pardon the repetition, but … your accounting software should be mirroring what’s actually happening in the physical world, so anytime something enters or leaves your warehouse, there is a transaction in your accounting software to mirror that. So when things get crazy with big sales orders at Christmas time, the only way your warehouse is going to be accurate is if everything up until that point has been recorded accurately.
Is it ever okay for your count to be off? No. It’s best to have a zero tolerance policy toward any margin of error. Of course, it’s going to happen but it should be avoided at all costs. By accepting a little bit of error, you’re accepting a potential breakdown in workflows that is guaranteed to lead to larger inventory problems. A seemingly small error can lead to an overall sloppy system and that sloppy system will not hold up when sales hit the roof.
– QuickBooks ProAdvisor Chris Robinson