Inventory Counting Methods: The Ultimate Guide for 2023

2.5 Minutes

In this article, we will explore exactly what inventory counting methods are and why they are important. We will also share our simple 10 step process for counting inventory. Read on to learn more.

inventory counting methods

Importance of Inventory Counting Methods

Inventory counting methods are important for a number of reasons, some of the most common reasons include:

Financial Accuracy:

Inventory counting supports financial health by ensuring accurate inventory valuation and aiding in cash flow management. This ensures that financial statements are accurate to aid in resource allocation and minimize costs associated with overstocking or stockouts.

Operational Efficiency:

Efficient inventory counting promotes operational efficiency by ensuring adequate stock levels for order fulfillment and streamlined supply chain management. It helps reduce lead times and operational costs while boosting productivity and customer satisfaction.

Risk Management:

Regular inventory counting mitigates risks associated with stock discrepancies, theft, or spoilage. Early identification of issues allows for corrective actions which enhance security, and accountability, and reduce potential losses.

Data Accuracy and Decision Making:

Inventory counts ensure data accuracy, pivotal for informed decision-making. Reliable data supports demand forecasting and inventory turnover optimization. This enhances customer service by ensuring product availability and timely delivery.

Compliance and Reporting:

Accurate inventory counting is essential for legal and financial compliance. It ensures transparent, verifiable records, meeting audit requirements, mitigating legal risks, and enhancing the business’s market reputation.

what are inventory counting methods

Inventory Counting Methods 

There are numerous types of inventory counting methods that are used in different businesses. Here are some of the most common methods:

1. Periodic Inventory Counting

Periodic inventory counting involves auditing the entire stock at specific intervals usually annually or semi-annually. This method requires stopping regular operations that lead to a complete shutdown of the warehouse or store to count every item manually.

2. Cycle Counting

Cycle counting is an ongoing inventory counting method where a subset of inventory in a specific location is counted on a specified day. It's more frequent and less disruptive than periodic counting. This ensures that the inventory records are accurate and up-to-date without halting operations.

3. Wall-to-Wall Counting

Wall-to-wall counting entails counting all items in the inventory at once. This is typically done at the end of the fiscal year. It can be disruptive to daily operations as business processes may need to be halted to accurately count and record all items in stock.

4. ABC Analysis

ABC analysis is a selective inventory counting method that categorizes items into three categories (A, B, and C) based on their importance. High-value items (A) are counted more frequently than medium-value items (B) and low-value items (C) to optimize the counting process.

5. Two-bin System

The two-bin system is a visual inventory counting method where items are stored in two bins and inventory is replenished when the first bin is empty. It ensures a continuous supply of items and is typically used for small and fast-moving inventory items.

6. Bar Code Scanning

Barcode scanning involves using barcodes and scanners to track inventory items and quantities. Each item has a unique barcode that is scanned during transactions. This provides real-time updates to inventory levels and facilitates rapid and accurate counts.

7. RFID Tagging

RFID tagging uses radio-frequency identification tags attached to inventory items for tracking. RFID tags store detailed information about each item and can be read wirelessly. This allows for quick and accurate inventory counts without manual handling.

8. Drone Counting

Drone counting involves using drones equipped with cameras or RFID readers to scan and count inventory items. This method is particularly useful in large warehouses as it reduces the time and labor required for inventory counts and increases accuracy and efficiency.

inventory counting method

10 Step Inventory Counting Method 

Use our 10 step Inventory Counting Method to ensure accurate inventory records and optimize your inventory management. Simply follow the steps below. 

Step 1: Select the Inventory Counting Method

Choose an inventory counting method that is most appropriate for your business size, type, and operational needs. Consider factors like the volume of inventory, frequency of turnover, and available resources.

Example: A retail store with a vast array of products opts for cycle counting. They decided to count different sections of the store on different days to avoid disruption.

Step 2: Organize and Prepare Inventory

Ensure that all inventory items are well-organized, labeled, and easily accessible to facilitate a smooth counting process. Pre-count preparations help reduce errors and increase the efficiency of the counting process.

Example: A warehouse dealing with electronics ensures all items like cell phones and laptops, are well-arranged on shelves and labeled with barcodes for easy counting and identification.

Step 3: Allocate Resources and Personnel

Assign a dedicated team of employees to count the inventory and provide them with the necessary tools and training. Ensure there is a plan in place to mitigate disruptions to regular operations.

Example: A grocery store assigns 5 employees to count dairy products after the store closes using barcode scanners to speed up the process and record the count accurately.

Step 4: Execute the Count

Carry out the inventory count according to the pre-established plan. Ensure each item is counted accurately. Document the counts in an organized manner for ease of verification and analysis.

Example: An auto parts store counts 100 spark plugs, 50 air filters, and 200 oil filters manually. They record each count in an inventory management system for accuracy.

Step 5: Verify the Count

Re-check the counted inventory to ensure accuracy and completeness. Compare the counted stock against inventory records to identify discrepancies.

Example: A bookstore counted 300 novels, but the records showed 320. The team re-counts to confirm the actual number present in stock.

Step 6: Analyze the Data

Evaluate the count data and focus on discrepancies to understand issues like shrinkage, theft, or errors in previous counts. Use this information to make informed decisions for inventory management.

Example: A clothing store found a discrepancy of 50 missing shirts valued at $25 each. This leads to an analysis to determine if it's a case of theft, miscounting, or other issues.

Step 7: Update Inventory Records

Adjust the inventory records to reflect the accurate count from the physical inventory process. Ensure the updated records are stored securely and are easily accessible for future reference.

Example: A pharmacy updates its records to show 150 bottles of cough syrup instead of the previously recorded 170 after a thorough count and verification process.

Step 8: Implement Improvement Measures

Based on the insights gained from the inventory count, implement measures to optimize inventory management, reduce errors, and mitigate losses. Regularly review and update these measures for optimal effectiveness.

Example: After identifying a recurring miscount issue, a hardware store introduces barcode scanning for real-time, accurate tracking of items like nails and hammers. This reduced the scope of errors.

Step 9: Schedule the Next Count

Establish a schedule for subsequent inventory counts to ensure that stock levels and records are consistently accurate and updated. Consider the chosen counting method and operational needs.

Example: A cosmetic store decides to conduct cycle counts every month, focusing on different product categories like lipsticks, eyeliners, and foundations to ensure ongoing accuracy of inventory records.

Step 10: Review and Adjust the Process

After each inventory count, review the process to identify areas for improvement. Adjust the methods, tools, and strategies as needed to enhance accuracy and efficiency in future counts.

Example: A toy store found manual counting to be time-consuming and prone to errors. They decided to invest in RFID tagging for automated, faster, and more accurate future counts of items like dolls, action figures, and board games.

the inventory counting methods


Evergreen Home Goods is a medium-sized retailer specializing in home decor items such as vases, candles, and artwork. Here’s how they implemented our simple inventory counting method:

Step 1: Select the Inventory Counting Method

Evergreen Home Goods opts for cycle counting to keep track of its diverse inventory without disrupting store operations. For instance, they count candles on Mondays, vases on Wednesdays, and artworks on Fridays ensuring each category is counted regularly.

Step 2: Organize and Prepare Inventory

The store ensures all products like the 50 assorted vases on one shelf, are well-organized and barcoded. This organization facilitates a smooth and efficient counting process, reducing the chances of errors.

Step 3: Allocate Resources and Personnel

Five employees are designated to count different sections of the inventory after store hours, using barcode scanners. For example, two employees are tasked with counting the 150 varieties of candles in the store.

Step 4: Execute the Count

The counting process is executed according to the plan, with every item being counted and documented. When counting vases, for example, the team records 50 glass vases and 30 ceramic ones.

Step 5: Verify the Count

Counted inventory, such as 80 artworks, is cross-verified to ensure accuracy. For instance, when the initial count showed 85 artworks, a recount confirmed that there were actually 80.

Step 6: Analyze the Data

Data from the count is reviewed and focuses on discrepancies. When 120 candles were counted but records showed 130, an analysis was conducted to determine if theft, damage, or miscounting occurred.

Step 7: Update Inventory Records

Records are updated to reflect the accurate count. For example, the stock records for candles are updated from 130 to 120 after verification. The updated data is stored securely for future reference.

Step 8: Implement Improvement Measures

Based on insights from the count, measures like installing additional security cameras are implemented to mitigate discrepancies. After noticing a recurring loss of luxury vases, increased surveillance is put in place around that section.

Step 9: Schedule the Next Count

The next cycle count is scheduled to ensure ongoing accuracy of stock levels. For instance, the next count for candles is set for the following Monday to maintain a weekly counting schedule.

Step 10: Review and Adjust the Process

The process is reviewed post-count, and improvements are made. After realizing that manual counts are time-consuming, Evergreen Home Goods decides to invest in RFID tags for faster and more accurate future counts of items like premium artworks.

We hope that you now have a better understanding of our inventory counting methods and can apply them effectively to optimize your inventory management.  

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