What is the role and importance of cycle counting in inventory management?

Most companies track inventory in a software inventory management system.  When an order is filled or shipment is received, the inventory management system is updated to reflect the change in count of items in inventory.Cycle counting is a process by which a company performs an actual physical count of its current inventory for the purpose of reconciling against the book value stored in the inventory management system.Cycle counting is important because:

• Regular cycle counting ensures that any missed transactions or mistakes in recording since the last cycle count are caught and corrected in a timely manner.
• Cycle counts ensure the company's financial statements reflect an accurate value of inventory on hand and cost of goods sold
• Cycle counts are an important internal control, and external auditors, equity investors, and banks that provide working capital financing will all require a company conduct regular cycle counts.

The frequency and scope of cycle counts vary based on a variety of factors, including:

• Volume of inventory on hand
• Volume of inventory transactions since last cycle count
• Historical accuracy of company's inventory management system

For low inventory, low transaction, accurate accounting systems - only infrequent counts of portions of inventory may be required.