Physical Inventory: A Comprehensive Guide to Warehouse Management

Physical counting involves physically counting all items in inventory to ensure accuracy and prevent discrepancies between inventory records and actual inventory levels. Poor inventory management can lead to excess inventory, stock-outs, lost sales, and increased carrying costs. Are you also facing time-consuming processes, costly errors, and difficulty maintaining accurate records when conducting physical inventory? Questions such as “What is physical inventory?” “How often should we conduct physical inventory counts?” and “What is the difference between physical and perpetual inventory counts?” often arise. How can you ensure that your inventory records accurately reflect your actual inventory?

What is physical inventory?

A physical inventory count is the process of physically counting all inventory items in a warehouse or storage facility at a specific point in time to verify their quantity and condition. A physical count is a benchmark to compare inventory records to actual inventory levels. This process involves physically counting, weighing, or measuring items to ensure that inventory records match the actual inventory. Physical counting is essential to maintaining accurate inventory records, identifying discrepancies, and ensuring effective inventory management.

It is an important task for businesses to ensure that the inventory recorded in the system matches the actual inventory on the shelf. It is a way to detect discrepancies (such as missing, misplaced or damaged items) and adjust inventory records accordingly.

Common pain points for businesses and sellers during physical inventory counting

Discrepancies between physical inventory counts and recorded inventory levels can lead to lost sales, out-of-stocks and excess inventory. Conducting physical counts of inventory can be labor-intensive, time-consuming and disruptive to daily operations. Errors in the taking physical count of inventory process can lead to financial losses, damaged customer relationships and operational inefficiencies. Businesses often have difficulty distinguishing between physical inventory, permanent inventory and digital inventory. Ensuring the accuracy of inventory records, especially for businesses with large or complex inventories, can be a daunting challenge. Unclear when to conduct physical inventory counts, resulting in missed opportunities for accurate reporting.

Why do you need to conduct physical inventory counts?

Ensure accuracy

Regular physical inventory counts help verify that the quantities reported in the inventory management system match the actual inventory. This is critical for order fulfillment and customer satisfaction, as well as financial reporting and operational efficiency.

Identify Discrepancies

A physical count can reveal issues such as stolen, damaged, or misplaced items, allowing businesses to proactively address these issues.

Improve Inventory Management

Accurate inventory counts help businesses make informed decisions about replenishment, order fulfillment, and overall inventory strategy.

How do you count physical inventory?

Counting physical inventory involves counting every item in the warehouse and comparing the actual quantity to the inventory recorded in the system.

Count All Items

Organize the warehouse, label shelves, and assign counting teams to specific areas. Perform a physical count of every item in the inventory, ensuring that all products (including raw materials, work in progress, and finished goods) are included.

Compare to Records

Perform a physical count of each item and compare the physical quantity to the inventory levels recorded in the management system.

Adjust Records

If discrepancies are found, adjust the inventory records to reflect the accurate quantity.

Analyze Discrepancies

Investigate any significant discrepancies to determine potential causes, such as theft, damage, or data entry errors.

What are the types of physical inventory?

Periodic Counts

This method involves performing physical counts at specific intervals (such as monthly, quarterly, or annually) to determine the ending inventory balance. This method is suitable for businesses with low inventory turnover.

Continuous Inventory

Also known as perpetual inventory, this method involves updating inventory records in real time based on transactions and physical inventory counts. Businesses using this method may still conduct physical inventory counts regularly to ensure accuracy.

What are the physical inventory counting methods?

Manual counting: Manually count each item. This method is simple but time-consuming and prone to errors.

Barcode scanning: Use a barcode scanner to automate the counting process. This method is faster and more accurate than manual counting.

Radio Frequency Identification (RFID): Use RFID technology to count items without direct line of sight. This method is very efficient for large warehouses.

What is the difference between physical inventory and perpetual inventory?

Physical inventory is a regular or irregular inventory verification method that focuses on confirming the current status of inventory; while perpetual inventory is a dynamic inventory management method that keeps inventory data real-time and accurate by recording every inventory change (such as inbound and outbound) in real time. The two complement each other and together constitute a complete system of inventory management.

A physical inventory is a snapshot of inventory at a specific time, while a perpetual inventory is continuously updated based on transactions. However, even businesses that use a perpetual inventory system should conduct physical counts to verify accuracy. Perpetual inventory systems are generally more accurate, but discrepancies can still be corrected through occasional physical counts.

The main difference between physical and perpetual inventory is the frequency of counts. Physical inventory involves regular counts, while perpetual inventory continuously updates records.

What is the difference between physical inventory and digital inventory?

Physical inventory is the actual number of goods in the warehouse, which is a physical existence; while digital inventory is inventory data recorded and calculated through the system, which is a manifestation of information. The difference between the two may arise from a variety of factors, such as system entry errors, inventory loss, theft, etc. Therefore, conducting physical inventory counts regularly to ensure consistency between the two is one of the important tasks of inventory management.

When is a physical inventory count usually conducted?

For financial reporting purposes, physical inventory counts are usually conducted at the end of the fiscal year. However, businesses may also choose to perform inventory counts more frequently, especially when they discover discrepancies or are preparing for an important sales period.

After a significant change in inventory, such as a large purchase, sale, or return.

When a discrepancy is suspected, investigate and resolve inconsistencies between inventory records and physical counts.

For businesses looking to maintain accurate inventory records and optimize operational efficiency, by understanding the types of inventory systems, the importance of regular inventory counts, and how to perform them effectively, businesses can significantly reduce discrepancies and improve inventory management processes.

Partner with Chinadivision for Efficient Inventory Management

At Chinadivision, we provide comprehensive logistics solutions and inventory management services to ensure your inventory is accurately tracked and managed. Our services include (but are not limited to):

Physical Inventory Assistance

Our experienced team can assist with efficient and accurate physical inventory counts.

Inventory Management Software

Provides advanced software solutions to automate inventory processes and minimize errors.

Warehouse Management

Warehouse management services ensure your inventory is optimally stored and handled.

Contact Chinadivision today to enhance your inventory processes and drive your business forward!