Physical inventory adjusts supplies present in storage with the inventory balance available in the system. In case there is a discrepancy, an issue exists. It can either mean incapability to deliver stocks to retail outlets or loss of inventory. In this article, we will discuss the overview of physical inventory and its benefits, the meaning of physical inventory count, types of physical inventory counts, problems with physical inventory count, and the ways you can improve physical inventory.

What Is Physical Inventory?

Physical inventory represents the actual count of goods available in stock. It can entail tasks like counting, weighing, and measuring inventory items. Inquiring third parties for counts of inventory items that have been dispatched to them is also included in physical inventory.

If a business maintains inventory records for every item in stock, these counts are equated to the recorded inventory balance. Subsequently, the recorded amounts are modified to be equivalent to the physical counts.

The business that maintains a periodic inventory system can use a physical inventory to determine the ending inventory balance. The value of the ending inventory balance is used to determine the cost of goods sold past the last physical count.

In other words, physical inventory signifies a process in which a business physically calculates its complete inventory. Tax regulations or financial accounting rules may authorize physical inventory to denote a precise value of the inventory. Alternatively, companies might need to count inventory to make sure raw materials can be restocked. These days, businesses might employ various strategies to curtail the disorder created by physical inventory.

What Is The Difference Between Physical And Perpetual Inventory?

Physical inventory is a subjective evaluation method in which the retail staff counts store inventory manually. Moreover, they settle the inventory levels of their POS software if they detect any discrepancies.

On the contrary, perpetual inventory takes place when stock levels are being updated after a company’s point of sale system completes a transaction, and the inventory levels for the sold items settle automatically.

For example, if your company holds five items of inventory and one of them gets sold, the recorded inventory levels of the particular SKU would automatically update to four by your POS system.

Stock levels are automatically settled whenever returns, sales, or exchanges occur. So, retailers can carry out physical inventory counts less frequently than they did when using paper and pen to track the inventory.

Physical Inventory

What Is A Physical Inventory Count?

The physical inventory count process involves the following steps:

Step-1: Manually calculate the stock available in-store.

Step-2: Match the inventory levels you count to the inventory levels recorded in the company’s POS system.

Step-3: Settling any discrepancies.
Generally, inventory counts will also consider the amount of stock held for each type of product.

The objective of a physical inventory count is to review in-store inventory levels and guarantee that the inventory levels registered in the company’s POS system are nearly 100% accurate.

The shrinkage rate helps to determine the accuracy of your inventory levels. It denotes the percentage of inventory unaccounted for from your POS records.

Let’s take an example to understand physical inventory count. Suppose there are 200 pairs of trousers in-store, but your company’s POS system only records 190 pairs of trousers. It implies that your trouser inventory levels are 95% accurate, and the shrinkage rate is 5%.

In such cases where you discover a discrepancy between in-store and recorded inventory levels, it is inevitable to settle inventory to make sure recorded inventory levels stay accurate.

When To Do A Physical Inventory Count?

It is advisable to perform a small physical inventory count while refilling stock. You need to confirm that the total sum of items is accurate. This confirmation initiates a comparison of future inventory checks. From this point, the frequency of a physical inventory count relies on various factors as below:

  • The number of items sold each day
  • The physical inventory method being used
  • The number of SKUs available in your inventory
  • The inventory technology being used (like barcode scanners and a POS system)

Accompanied by partial inventory counts, merchants are advised to perform a comprehensive physical inventory count minimum once at the closing of every calendar year. Doing this guarantees you a precise inventory record going forward into the following year.

The Four Types Of Physical Inventory Counts

The four types of physical inventory counts are:

i. Manual counting
ii. Electronic counting
iii. Cycle counting
iv. Full inventory counting

i. Manual Counting:

In this type, store associates manually count each stock item in the stockroom and on the sales floor. Subsequently, they record the value manually using a pen and paper. Most stores don’t use this method since it has a high chance of errors and is time-consuming.

ii. Electronic Counting:

Recently, online retailers have been using digital inventory solutions through the implementation of supply chain technology. The electronic counting method provides precise inventory counts in real-time. Hence, inventory optimization is streamlined.

This method uses an inventory tracking system or other technology to improve visibility. The same is possible by tracking data and amassing information as goods pass across the supply chain.

Several brands don’t have enough bandwidth to carry out manual inventory counts. Therefore, electronic counting is gradually becoming standard and is substituting conventional inventory management techniques.

iii. Cycle Counting:

It is a manual method wherein inventory is divided into more controllable sub-sections and then physically counted periodically.

This method is perfect for those organizations that maintain a warehouse and don’t intend to make their operations sluggish. Moreover, it assists in disintegrating the inventory count process into tinier tasks, decreasing operational expenses, and streamlines the inventory counting process.

iv. Full Inventory Counting:

Usually, total inventory counting takes place at the finish of the calendar year. It is carried out after the year-ending holidays when the inventory levels are generally at their lowest values. The retail teams calculate ending inventory available in-store and commence the New Year with a precise record that entails the retail value of their products and the cost of goods sold.

The time required to undertake physical inventory counts depends on the number of SKUs carried by your store. Usually, to embark on a physical inventory count, merchants will close their stores or appoint a team to work momentarily. Consequently, several small retailers restrict complete inventory counts to once or twice a year. In between, they opt for periodic cycle counting.

Physical Inventory Vs. Cycle Counting

Asset management allows businesses to trace the complete life cycle of an asset. It includes the entire asset management process, including overseeing products a company uses to function. Furthermore, asset management includes tracking equipment, vehicles, devices, computers, fixtures, movables, and more.

Physical Inventory Periodic Merchandising Inventory
Physical inventory is a type of inventory counting method that counts all forms of inventory in a company at a specific period (usually yearly).
Cycle counting is a perpetual inventory counting system in which designated inventory items are counted on a definite day.
In this method, the business needs to count every inventory item for a specific period.
Cycle count is organized for various types of inventory at multiple times.
This method requires a warehouse inventory freeze.
This method doesn’t need a warehouse inventory freeze.
This method offers limited flexibility because it can only be commenced in one way.
In this method, the company can determine how the inventory count must occur, what sequence to count the inventory, the types of inventory to be counted initially, etc.
This method is more appropriate for companies that upkeep small amounts of inventory.
This method is perfect for companies that maintain vast amounts of inventory.
This method is time-consuming and very complex.
This method is comparatively less complicated and can be accomplished in less time.
It is usually a large-scale approach with comparatively less flexibility, leading to substantial short-term disorder in the business.
It follows a continuous approach and rarely disrupts other business activities. However, it can’t be neglected for a prolonged period or outsourced at year closing when the company’s team reconciles from the holiday flux.

Which one to choose - Physical Inventory or Cycle Counting?

Both these methods intend to enhance inventory management. The physical Inventory method offers assurance about inventory at the start of a new financial year using the beginning inventory formula.

On the other hand, cycle counting is more carefully lined up with the requirements of several businesses for enhanced agility, flexibility, and the latest information which advises decision-making. Following existing cycle counts of major SKUs or industrial parts, the company can prevent superfluous orders and organize its cash more efficiently.

Because warehouses and many other facilities turn more complex and extensive, the physical inventory method becomes more challenging, expensive, and time-consuming. Moreover, the comparative business value of the cycle counting increases.

Certain companies adopt a combination of physical inventory and cycle counting.

Certain retailers schedule stock count for the entire year, emphasizing high-demand items. Subsequently, they carry out a comprehensive physical inventory after the holiday season ends.

Some companies may carry out one physical count to set up a robust foundation for a shift to cycle counting.

Physical Inventory

Annual Physical Inventory Count

Regardless of the size of the business, annual physical inventory is a crucial process. It facilitates business owners to assess the amount and value of inventory on hand. Moreover, it lets them recognize discrepancies between actual and recorded inventory levels.

It enables organizations to commence a new year with a clean depository. Furthermore, it guarantees the accuracy of the inventory and ascertains that goods are not misplaced. Valuable statistics about the company’s stock can be obtained from the annual physical inventory count. It assists a company in increasing its profit.

Benefits Of Doing A Physical Inventory Count

After getting familiar with the physical inventory count, let’s look at its benefits:

Provides a precise and current inventory count:

The retail inventory is only 63% accurate. The inaccurate inventory regarding stock levels or quantity for products of all sizes leads to various retailer issues. 36% of senior organization executives usually aim to improve real-time inventory exposure for a better customer experience.

Avoid over or under stocking:

The incompetence in tracking physical inventory can lead to excessive or insufficient inventory. This can lead to budgeting problems if not resolved.

With a precise inventory record and POS system reports, the company can better comprehend the popularity of the items they sell. They can invest sufficient funds into inventory to fulfill demand and avoid under-stocking or overstocking.

Retailers never wish to distract their customers due to out-of-stock problems. This problem was the most significant reason customers leave a store without buying anything. The out-of-stock issue has a domino impact on retail sales.

Decreases inventory shrinkage:

One of the common problems retailers face is the loss of inventory. It occurs when their stock is lower than the figure shown in their inventory management software.

Employee theft and burglary are prominent reasons for stock shrinkage. Retailers can follow a weekly partial inventory count to weaken discrepancies between the inventory levels registered in their POS system and the store’s inventory on hand.

Retailers can adopt a smaller size of inventory which provides various benefits. These benefits include ease of counting inventory, sufficient time to detect the cause of shrinkage, and ease of reconciliation.

High sell-through rate for struggling inventory:

Certain products may not sell as per the company’s expectations. In those cases, merchants can restock in-store, market them to attract interest, or provide an exclusive discount to encourage purchases. As a result, sell-through struggling inventory can safeguard a return on your initial investment and accommodate favorite items that sell at a higher margin or higher volume.

Physical Inventory

Issues With Physical Inventory Count

Consumes A Lot Of Time And Resources:

Companies’ primary issue with carrying out physical inventory counts is consuming substantial time and resources. Sometimes, companies close sections or all operations to conduct their physical inventory. If this takes place, there is a jeopardy of inefficient customer service.

Insufficient Staff:

Typically, discrepancies occur in a physical count since the temporary or internal staff doesn’t precisely record specific inventories. Alternatively, they categorize items or register new items incorrectly. Irrespective of the accuracy levels, staff must not be counting certain things like

  • Any acknowledged thefts
  • Supplier receipts after the decided-upon cut-off date by count
  • Any acknowledged shipments that proceeded without invoices

Depends On The Manual Process:

A few years back, all warehouses and stores had to track and register all physical inventories by hand using a pen and paper. Although this method might feature a prolonged track record, it presented various issues. Any system that significantly depends on manual efforts comes with errors. This is especially true in cases of more extensive operations.

Nowadays, companies have begun implementing advanced inventory control systems which depend on physical inventory software to computerize all processes. Rather than counting all inventory items by hand, organizations can use a barcode scanning program.

Selection Of A Time Of Year:

Physical inventory counts can be a rigorous process, so companies must dedicate adequate resources and time. The best time to count physical inventory may differ based on the organization’s availability and need. Certain companies may prefer to hold their count in the fall before the hectic holiday season begins in the fall.

Methods For Counting Physical Inventory

Whatever you choose for counting physical inventory, it must guarantee accurate inventory. The three critical strategies are:

i. Manual Completion:

This method entails physically calculating and registering existing inventory levels. Also, it involves making updates in the records every time there is a discrepancy. In this method, organizations have to count the inventory value on hand and then divide it by the expected inventory value (depending on items sold and how much inventory is being ordered lately).

Remember that carrying out manual physical inventory counts could be time-consuming. Also, it comes with the likelihood of human errors and discrepancies that can influence profit and balance sheets.

ii. Electronic Counting:

Recently, online retailers have been using digital inventory solutions through the implementation of supply chain technology. The electronic counting method provides precise inventory counts in real-time. Hence, inventory optimization is streamlined.

This method uses an inventory tracking system or other technology to improve visibility. The same is possible by tracking data and amassing information as goods pass across the supply chain.

Several brands don’t have enough bandwidth to carry out manual inventory counts. Therefore, electronic counting is gradually becoming standard and is substituting conventional inventory management techniques.

iii. Cycle Counting:

It is a manual method wherein inventory is divided into more controllable sub-sections and then physically counted periodically.

This method is perfect for those organizations that maintain a warehouse and don’t intend to make their operations sluggish. Moreover, it assists in disintegrating the inventory count process into tinier tasks, decreasing operational expenses, and streamlines the inventory counting process.

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How To Improve Physical Inventory?

The below strategies will help improve physical inventory:

Completing the count as fast as possible:

A crucial step in inventory reconciliation is to complete the physical count. The count sheets will come from teams assigned for that, so organizations are recommended to follow the recommendation of the software publisher to carry out the reconciliation.

It is wrong to wait until the whole count is finished or for the accounting department to complete its task. If the organization decides to wait, it will have to consider receipts/ sales that took place since the counting process ended. Hence, it increases the odds of error.

Completing the count as quickly as possible also involves the comparison of the counts with an automatic inventory system.

Examining various inventory items for accuracy:

Managers must examine different inventory items to ensure accuracy. This strategy recommends not waiting until the counts are over but analyzing various inventory items beforehand. Also, it implies that the organization must ascertain that the checking process is visible to the team; if an inaccurate check is found, the corresponding person must be instructed to be careful.

After examining various inventory items, the next step is to update them with the counts. But before that, it is recommended to carry out quality check counts.

Refilling of stocks:

Most physical inventories slow down when attempting to find the inventory. This strategy implies setting up a ‘bin’ system for the stock room and shelves and ascertaining that your inventory is perfectly put away. Following this strategy significantly decreases errors.

Other tips to improve physical inventory:

  • The use of scanners or other latest stock counting technology
  • Careful selection of staff that can count precisely
  • Immediately resolving discrepancies
  • Conducting a mock count through planning
  • Make sure the cost of the item being counted is not shown during the count
  • The use of inventory software
  • The inclusion of the following details on the count sheets: the item number, item description, and the price.

Conclusion

Calculating the complete inventory is inevitable to guarantee the precise value of the inventory. This is possible with the Physical Inventory. It helps to avoid discrepancies by comparing the actual stocks with the inventory in the system. The methods used to conduct Physical Inventory help organizations to get an accurate value of the inventory and stay away from budgeting problems.

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FAQs

In the physical inventory process, a business physically calculates its whole inventory. It is the stock made available for purchase in-store. During the end of a reporting period, companies plan a physical inventory count.

Regularly counting physical inventory guarantees that items reported in a company’s warehouse match the inventory records.
The fundamental purpose of a physical inventory is to prevent critical discrepancies like inventory shrinkage and settle inventory as soon as possible. Therefore, when the accounting period terminates, the company will have accurate inventory counts that can be included in its balance sheet.

Other objectives of a physical inventory:

  • Examine and balance inventory levels
  • Supervise theft
  • Creating an accurate budget
  • Record accurate earnings

It is an inventory management technique (also recognized as a physical inventory count) in which retail staff count the store’s physical inventory and equate these to the inventory levels registered in the POS system.

The following steps help you to take physical inventory:

  1. Schedule the date
  2. Assign your counters
  3. Notify all storage locations to carry out a physical inventory count on the specified date.
  4. Review your stock
  5. Provide a map of your storage, backroom, and floor so that employees can know where they should go
  6. Prepare your categories count and combine similar items
  7. Perform a pre-count
  8. Remind employees about what they learned in training
  9. Demonstrate the process of taking a physical inventory count with example to employees
  10. Begin counting inventory with details like location, item description, part number, quantity, and unit of measure
  11. Double-check every section to guarantee the accuracy of the entries
  12. Compile physical count inventory reports (on the spreadsheet) over a given period to identify possible trends

The physical inventory formula is as below:

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

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