Physical Inventory: Everything You Need to Know in 2023

2.2 Minutes

In this article, we explore what physical inventory is and its common types. We also cover its importance and share our step-by-step physical inventory process. Read on to learn more. 

physical inventory

What is Physical Inventory?

Physical inventory refers to the process of counting by hand all of the merchandise and materials a business has in stock. It involves a manual count of all products to ensure that the actual inventory aligns with the recorded inventory numbers in the company's accounting system.

Example: ABC Retail counted 150 smartphones, 200 laptops, and 500 headphones during a year-end physical inventory. This revealed a discrepancy of 10 missing smartphones which led to a records adjustment.

what is physical inventory

Types of Physical Inventory

Here are the most common physical inventory types:

1. Wall-to-Wall Inventory:

Wall-to-wall counts all items at once typically requiring a temporary business closure. It’s often done annually or bi-annually to align recorded inventory with actual stock.

2. Cycle Counting:

Cycle counting involves regularly counting segments of inventory throughout the year eliminating the need to halt operations while maintaining accurate, up-to-date records.

3. ABC Analysis:

Inventory is categorized into ‘A’, ‘B’, and ‘C’ based on importance. ‘A’ items are counted frequently, while ‘B’ and ‘C’ are counted less often ensuring efficient management of valuable items.

4. Zone Counting:

In zone counting, employees count inventory in assigned zones in larger warehouses or stores. It ensures systematic counting without pausing entire operations.

5. Automated Inventory:

Technology like barcodes or RFID tags is used for real-time inventory counting. Advanced setups may include drones or robots, ensuring immediate inventory updates and accuracy.

the physical inventory

Benefits of Physical Inventory

Physical inventory provides numerous benefits to a business, including:

1. Accuracy in Reporting:

Physical inventory ensures the accuracy of inventory records, enhancing the reliability of financial statements and business analytics.

2. Regulatory Compliance:

It helps in meeting legal and tax obligations by providing precise inventory levels, and ensuring businesses adhere to regulatory standards.

3. Loss Identification:

Physical counts help identify losses due to theft, damage, or misplacement, enabling companies to take corrective measures.

4. Operational Efficiency:

It supports efficient inventory management, aiding in optimal stock levels, order management, and warehouse organization.

5. Cash Flow Management:

Accurate inventory data supports better cash flow management by minimizing excess stock and freeing up capital for other investments.

6. Customer Satisfaction:

By ensuring optimal stock levels, businesses can meet customer demands promptly, leading to enhanced customer satisfaction and loyalty.

7. Process Improvement:

Regular physical inventory checks reveal areas for process improvements leading to enhanced inventory handling and management efficiency.

what is the physical inventory

9 Step Physical Inventory Process

To maintain accurate inventory records, you can follow our simple 9 step process below. 

1. Preparation and Planning

Define the scope and schedule for the physical inventory count. Ensure that all necessary resources including personnel and equipment, are ready.

Example: The manager schedules the inventory count for June 1 ensuring 10 staff members and necessary counting equipment are available. The team is instructed to count all items with a focus on the electronics section.

2. Organize Inventory

Arrange and organize items systematically to facilitate an efficient counting process. Clear clutter and ensure items are accessible.

Example: All mobile phones, including iPhone 13s and Samsung Galaxy S22s, are organized on specific shelves. Obsolete items and clutter are removed to ensure clear visibility and accessibility.

3. Train the Counting Team

Train the team on the counting procedures to ensure accuracy and efficiency. Provide guidelines on how to handle discrepancies and common issues.

Example: The counting team receives training on using scanners to count products and is instructed to double-check quantities for high-value items like laptops. They are also guided on recording discrepancies.

4. Counting Process

Count every item in the inventory and record the numbers ensuring accuracy. Utilize technology like scanners or counting apps to facilitate the process.

Example: The team counts 200 iPhone 13s and 150 Samsung Galaxy S22s using barcode scanners to ensure accuracy. Data is directly fed into the inventory management system for real-time updates.

5. Verification

Cross-verify the counted numbers with the inventory records to identify discrepancies. Make adjustments where necessary to align with the physical count.

Example: The recorded inventory shows 210 iPhone 13s, but only 200 are counted. The record is updated to reflect the actual count and the reasons for the discrepancy are investigated.

6. Analysis and Reporting

Analyze the results and create detailed reports highlighting discrepancies, losses, or gains. Utilize this data to improve inventory management practices.

Example: The report reveals a loss of 10 iPhone 13s initiating a review of security protocols. The data also highlights an excess of Samsung Galaxy S22s prompting an analysis of sales forecasts.

7. Implement Improvements

Utilize the insights gained from the physical count to optimize inventory management. Implement changes to prevent discrepancies and enhance efficiency.

Example: Enhanced security measures are implemented to prevent theft of high-value items like laptops. A new ordering system is introduced to prevent overstocking of products like Samsung Galaxy S22s.

8. Regular Updates

Regularly update the inventory records to reflect sales, purchases, and returns. Consistent updates ensure that records remain accurate between physical counts.

Example: After selling 50 iPhone 13s and receiving a new shipment of 30, the inventory records are immediately updated to reflect the current stock of 180. Regular checks ensure accuracy is maintained.

9. Schedule Next Count

Based on the insights and experiences from the current count, schedule the next physical inventory. Adjust the frequency and methodology as per the need.

Example: Given the discrepancies found, the next count is scheduled in 6 months instead of a year. Special attention will be paid to high-value items to ensure accuracy and security.

a physical inventory

Case Study Example

Tech Haven is a retail store that specializes in selling electronic devices and accessories. Let’s explore how the company applied our 9 step physical inventory process. 

Step 1. Preparation and Planning

Tech Haven schedules a physical inventory count for July 10 ensuring that 15 staff members and additional barcode scanners are ready for the task. The plan is to count all items in the store, paying special attention to popular products like Apple AirPods and Sony Headphones to guarantee an efficient and thorough process.

Step 2. Organize Inventory

The store’s staff ensures that all items including 500 units of Apple AirPods and 300 units of Sony Headphones are neatly organized and easily accessible. They remove old stock and clutter to facilitate a seamless and efficient counting process.

Step 3. Train the Counting Team

Each team member at Tech Haven receives training on using barcode scanners for counting items including a practical example of counting 100 units of Samsung Galaxy Tablets and 50 units of Apple iPads. They are instructed on the procedures to ensure accuracy and efficiency.

Step 4. Counting Process

During the count, the team efficiently uses barcode scanners to record items counting 480 Apple AirPods and 290 Sony Headphones. The real-time recording ensures that the inventory management system is immediately updated with the counted numbers.

Step 5. Verification

The counted numbers are cross-verified with the recorded inventory. For instance, the records indicated 500 Apple AirPods, but only 480 were counted. The inventory is updated and an investigation is initiated to account for the discrepancy.

Step 6. Analysis and Reporting

A detailed report is prepared revealing a loss of 20 Apple AirPods prompting a review of security protocols. The data also helps in understanding the current status of each product's stock ensuring that the inventory management strategies are adjusted accordingly.

Step 7. Implement Improvements

Based on the insights from the count, security measures are enhanced to prevent losses, and an efficient ordering system is developed to manage the stock of fast-moving items like Apple AirPods effectively.

Step 8. Regular Updates

The inventory records are consistently updated to reflect the current status. For instance, after selling 30 Apple AirPods and receiving a new shipment of 50, the records are promptly updated to show 500 units in stock.

Step 9. Schedule Next Count

Given the discrepancies found, the next physical inventory count is scheduled to occur in six months instead of a year with special emphasis on enhancing the accuracy and security of high-value items like electronic gadgets.

We hope that you now have a better understanding of what physical inventory is and how to implement our physical inventory process to maintain accurate inventory records. 

Turn your spreadsheet into software