Cycle Count vs. Physical Inventory Count: Definitions and Key Differences

Updated June 24, 2022

Maintaining accurate inventory is crucial to the success of any business, and according to IRS rules and generally accepted accounting principles, a business needs to perform inventory count intermittently. Two strategies that help companies accomplish this are cycle counting and physical inventory. Knowing which one is the better option for you is important to maintaining accurate inventory information. In this article, we define what these options are and the key difference between cycle count versus physical inventory.

What is cycle count?

Cycle count is an inventory auditing process that is part of inventory management. In this process, you continuously count samples within a specific time period. You set the frequency at which you want to count the items in your warehouse. This eliminates the need to count everything at once, which can be time-consuming. Some companies may count the same items several times to see if different people get the same results. This step is crucial, as it can help identify and fix any error with the counting method.

To ensure a cycle count is reliable, some companies work with either internal or external auditors, who continuously observe and recommend changes to the different counting methods. They may ask your team to use them at different times during inventory verification to determine which is more reliable. Once one method proves accurate, they recommend it and further ensure your team uses it throughout. The following are cycle counting methods commonly used in inventory auditing:

Control group: This method emphasizes counting a small sample several times within a defined period. Repeating the count multiple times makes it easier to point out any errors and fix them until the count is accurate.
Random sample: As the name suggests, you randomly pick items you count. For example, if a warehouse has many items, the counting team decides which items to count every day.
ABC analysis: This method prioritizes counting items that represent the most significant value in the warehouse. It uses the Pareto principle method as the basis, emphasizing counting a fraction of the total items (20%).
Hybrid counting: Some companies combine different methods to address their needs. With the hybrid approach, the majority combine ABC analysis with any other method to count different items at the specified period.

What is a physical inventory count?

Physical inventory count involves a detailed count of all the items in your warehouse, stockroom and other locations. You set up specific days to carry out a comprehensive count to ensure what you have on the shelves is the exact figure your inventory management system displays. As physical counts are time-consuming, it is best to do them once a year. They may help meet financial accounting rules or tax regulations.

Even when a business uses inventory scanning technologies or radio frequency tags, physical inventory counts often disrupt a business' regular schedule. This may result in some businesses suspending some operations, such as receiving and shipping, until the process ends. Whether you have a small or large inventory, these steps can help ensure your physical count is a success:

Define the specific dates and notify all staff on the same.
Pick staff do the counting and to record the quantity.
Break up the counting process into different phases or categories.
Assign different individuals to those phases or categories.
Motivate your staff to count as many items as possible before the due date.
Record, double-check and review for discrepancies.

Related: Guide To Physical Inventories

Cycle count vs. physical count

While both methods improve inventory management, there are notable differences between them that have significant implications for daily warehouse operations, including:

Scheduling

Cycle count can happen every day where a company has a dedicated team to count items in its warehouse and stockroom. It can also occur on specific days in a week. Regardless of how you choose to implement it, cycle count occurs repeatedly. For cycle counting to be successful, companies commit to doing it on the planned schedules. On the other hand, physical count happens once a year and may disrupt a regular business operation while in progress.

Items counted

Cycle count gives businesses the flexibility of counting different items at different times. You can choose your sample randomly or have a specific way of determining what to count. You count all items at once during the physical count. The process ends after tallying all items.

Related: How To Track Inventory

Level of disruption

Implementation of cycle count, in most cases, resembles other regular business operations. Sometimes you may not notice its impact on the day-to-day business operations, as it rarely causes a disruption. You only notice it's in progress when you see members of your team doing the counting. When a physical count is in progress, some operations are likely halted. A physical count is labor-intensive and time-consuming, and if you have staff involved, some operations like shipping and receiving might slow. Some companies hire temporary employees to keep their businesses fully operational during the physical count.

Level of flexibility

Cycle count gives companies the flexibility of approaching inventory verification in different ways. For example, they can count by category, quantity or value, such as focusing on items that represent the most significant value in the house. With physical count, while you can start by focusing on specific items, you still have to count everything within the specified period.

Types of companies

Cycle counts favor large companies with huge inventories over the small ones. As they may not have the time to carry out a physical inventory, they benefit from continually carrying out cycle count. Small businesses with smaller inventories may find it more convenient to carry out an annual physical inventory than spend more time on cycle counts. Since physical inventory count may adhere to IRS regulations and generally accepted accounting principles, you may find companies with large inventories creating time to complete them.