Perpetual Inventory vs Physical Inventory

Perpetual Inventory vs Physical Inventory: What Are the Key Differences

By Team TranZact | Published on Feb 26, 2024

A good inventory management system is important for all types of businesses, whether small or big. As a business owner, you should know the best inventory tracking methods to run your business smoothly. In this blog post, we will understand perpetual inventory vs physical inventory. We will also understand the pros and cons, how you can choose the best inventory method for your business, the latest technologies and the best methods to run your manufacturing business smoothly.

Perpetual Inventory

Perpetual inventory is a way of managing inventory by constantly updating records through a system. It helps you stay up to date with real-time data. A perpetual inventory system also helps you avoid products from running out of stock by keeping you updated with accurate inventory details. Here is an example that will help you understand perpetual inventory vs physical inventory. Imagine a car manufacturing company that uses the perpetual inventory method to keep track of all the parts needed to build cars. When they receive or purchase new parts, they update their inventory right away. But, if they use some parts to build cars, they remove those from the inventory. This helps them to know exactly what they have at any time. Using this, they can plan production and avoid any delays in making cars.

Physical Inventory

Physical inventory is a way of checking and counting all the products a business has at specific times. In this physical inventory method, people manually count each item in the inventory and compare it to what is recorded in the books. Many small businesses use pen and paper, mobile devices, or specific best inventory management software to keep a record of physically managed inventory. Physical inventory can be more cost-effective than perpetual inventory, but it takes more time because it is done manually. There may be chances of human errors due to manual counting. This can lead you to redo the work.

What Are The Differences Between Perpetual And Physical Inventory Systems?

Efficient management of inventory requires a clear differentiation between perpetual and physical inventory systems. When you use the best inventory method, you can run your business more easily. Here are some quick differences between perpetual and physical inventory systems that will help you choose the specific one for your business.

Perpetual Inventory SystemPhysical Inventory System
The perpetual inventory system is automatic and does not contain data mistakes.The physical inventory system is managed manually. Thus, it increases the chance of human errors.
The perpetual inventory method provides real-time inventory details.A physical inventory system involves counting and validating actual stock at a specific time.
The perpetual inventory method relies on technology (barcode inventory software).The Physical inventory method does not rely on technology because you physically check each item.
Perpetual inventory method provides ongoing and instant insights into inventory levels. Operations do not stop counting.This inventory tracking methods involve shutting down operations during counting.
The perpetual inventory method provides up-to-date information without physical counting.Physical inventory method provides accurate information on stock quantities and qualities but involves more annual or quarterly effort.

Pros & Cons Of Perpetual Inventory System

To have a better understanding of perpetual inventory vs physical inventory, you should know about the pros and cons of each system. Here, we will explore the advantages and disadvantages of a perpetual inventory system. This will help you figure out when to use this system and analyze the challenges that might come up.

When You Use A Perpetual Inventory System?

When you want to adopt perpetual inventory management for your business, analyze these aspects to make better decisions:

  • Perpetual inventory is very helpful for large amounts of stock. So, if you own a business that deals with lots of products or is getting bigger, then you can choose a perpetual inventory system.
  • If you own a business that deals with lots of products or is getting bigger, then you can choose perpetual inventory.
  • Perpetual inventory can be good for manufacturing businesses whose warehouses are in different places. It can keep track of inventory in all locations and share information smoothly.
  • If your business has many daily transactions, you can go with the perpetual inventory method because it uses automation, which helps reduce mistakes and makes things easier for your employees.
  • Perpetual inventory would be the right choice if you can handle higher initial costs. This is because it is fruitful in the long run.

Challenges Of Implementing A Perpetual Inventory System

If you have decided to go with a perpetual inventory system, then you should also know its disadvantages. Here are some challenges that you may have to face with a perpetual inventory management system.

  • Sometimes, things like damage, spoilage, or stealing can cause stock loss. So, addressing these challenges is important when implementing a perpetual inventory system. This makes it hard to keep track of how much stock remains there.
  • Mistakes in scanning, putting things in the wrong place, or problems with the software can mess up the system.
  • This inventory tracking method would require a dedicated person or a team to make all the data entries in the software.
  • Hackers can try to break into your computer system and mess things up. This may cause big problems and make it necessary to spend a lot of money on security measures.
  • Setting up a perpetual inventory system can cost a good amount, especially in the beginning.

Pros & Cons Of Physical Inventory System

Physical inventory systems have their strengths and weaknesses. You need to know if you want to use this system in your business. So, let’s explore the pros and cons to gain insights into the effectiveness of this approach.

When You Use Physical Inventory System?

To make informed choices regarding the adoption of physical inventory management in your business, consider assessing these factors.

  • If your business is small and deals with fewer transactions, a physical inventory system can be simpler and more manageable.
  • When you want to identify problems like loss or mistakes in your inventory management, a physical inventory system can be an ideal method to make corrections.
  • When your business lacks the necessary technology infrastructure for a perpetual system, physical inventory can be helpful. It involves manually counting and recording the actual quantity of items in stock and provides a practical solution without relying on advanced technology.
  • You can use a physical inventory method to avoid overstocking and shrinkage. This will help you find differences between actual stock and what your record says.
  • If you are comparing the cost of both inventory systems, the physical inventory system will be more budget-friendly.

Challenges Of Implementing A Physical Inventory System

Once you have an initial understanding of perpetual inventory vs physical inventory, you should know the advantages and challenges of each system. Here are some challenges of implementing a physical inventory system in your company.

  • Physical inventory involves manually counting items. This can be time-consuming and may disrupt daily business operations.
  • There is a risk of human error during manual counting. This can lead to inaccuracies in record-keeping and inventory levels.
  • Physical counting of products can be effective. However, there can be difficulty in identifying damaged or expired products.
  • This system depends on annual or quarterly counts. This makes it less suitable for businesses with high transaction volumes or frequent stock movements.
  • Physical inventory systems rely more on paper-based records and less on technology. This can cause errors and inaccuracies.

How To Choose The Best Inventory Method For Your Business?

Both perpetual and physical inventory systems offer advantages, but the choice depends on several key factors. You should understand these key factors of perpetual inventory vs physical inventory and decide the best among them for your business.

Analyze Your Inventory Size

The main factor of perpetual inventory vs physical inventory is the inventory size of businesses. For small inventories, a physical system is easier to count, while large or growing businesses can benefit from the perpetual system. Thus, analyze your inventory size to understand which is more suitable for your business.

Figure Out Your Transaction Volume

If you deal with frequent orders and multiple transactions daily, then a perpetual inventory system can be the best for you. On the other hand, if you deal with fewer transactions and fewer orders daily, you can benefit from a physical inventory system.

Your Business Locations Can Be An Important Factor

If your business is running in multiple locations, you should go with a perpetual inventory system to monitor every item in real time and make more informed decisions. However, if you are doing business in a single location and dealing with fewer orders, then a physical inventory system can be an easy-to-manage and cost-effective solution.

Understand Your Budget And Technical Infrastructure

A perpetual inventory method requires technical infrastructure and a nice budget, while a physical inventory system does things manually and doesn’t rely much on technology. Thus, if you have a large enough budget and want to use cutting-edge technology, then a perpetual inventory system can be the best option. However, if you don’t have an initial investment amount, then you can depend on the manual counting of your products with a physical inventory system.

Inventory Management With TranZact

Inventory management is one of the most important factors in any type of business. It is important to choose the best inventory management system for your business. So, if you have understood the details of perpetual inventory vs physical inventory, you must have decided on the best inventory tracking methods to go for your business. However, if you don’t want to take the burden of managing perpetual or physical inventory by yourself, then you can try TranZact. TranZact is the easiest software for Indian SME Manufacturers. Their easy-to-use tools, like cloud ERP software and inventory management software, can help you manage operations in your business. So, if you are seeking growth and efficiency, TranZact is your reliable partner.

FAQs

1] Why is the perpetual inventory system better?

A perpetual inventory system is better because it provides you with real-time information about your products that you can use to make quick and informed decisions for your business.

2] What are the 3 advantages of perpetual inventory systems?

  1. It provides real-time information with accuracy.

  2. It saves you lots of time in tracking your inventory with no human errors.

  3. It helps you easily manage your stock and improve customer service.

3] Does perpetual inventory use LIFO or FIFO?

Perpetual inventory can use either LIFO (Last In, First Out) or FIFO ( First In, First Out) methods. The choices completely depend on the business owners or policymakers.

4] What is the difference between inventory and physical stock?

Inventory is focused on every aspect of your products, from raw materials to finished goods and even those that are in process, damaged or returned. In comparison, a physical stock finds out the actual quantity of ready-to-sale items in your inventory.

5] What is the difference between a physical and perpetual inventory?

A physical inventory involves manual counting and recording of all items at your company at a specific time, which also increases the chance of human errors. On the other hand, the perpetual inventory system relies on automated counting and provides real-time data with negligible errors.

6] What are the examples of perpetual inventory?

  • Retail Point of Sales (POS) Systems
  • Scanning of Parcels or Couriers through Bar Code
  • Bar Code Scanning at Warehouse
  • Managing huge inventory at Grocery Stores
  • Quick Billing at Shopping Malls
  • Advanced Inventory Management Software like TranZact

7] What is the perpetual inventory formula?

The perpetual inventory formula can be expressed as follows:

Closing Inventory= Opening Inventory + Purchases - Cost of Goods Sold (COGS).

8] Why is physical inventory used?

The physical inventory method is used to ensure that the actual stock matches the recorded inventory. It helps manufacturing businesses identify conflicts and maintain accurate records.


TranZact Blogs

Subscribe to Our Blog
Related Blogs
Objectives of Inventory Management

Inventory Management System: Objectives, Goals & Techniques Explained

Discover the objectives, principles, and techniques of an effective inventory...

Inventory Management Tools and Techniques

5 Best Inventory Management Tools and Techniques You Need to Know

Discover the 5 best inventory management tools and techniques for...

Stock Management System

Stock Management System: The Complete Guide

Unlock the comprehensive guide to stock management systems: understand its...

Inventory Levels

Inventory Levels: Meaning and Different Types of Stock Levels

Discover the meaning and types of inventory levels, including minimum,...

Factors to Consider When Choosing Inventory Management Software

7 Factors to Consider When Choosing an Inventory Management Software

Understanding Inventory management software and how it works to simplify...

Selective Inventory Management

Selective Inventory Management: Optimizing Inventory Efficiency

Learn how selective inventory management techniques can optimize your inventory,...

RFID for Inventory Management

RFID For Inventory Management: The Pros & Cons

Explore the pros and cons of RFID inventory management. Compare...

HML Inventory Analysis

HML Inventory Analysis: A Method to Optimize Inventory Management

Discover how HML analysis in inventory management enhances control and...

Inventory Tracking Software

Boost Supply Chain Efficiency with Right Inventory Tracking Software

Boost supply chain efficiency with inventory tracking software. Explore strategies...

TranZact

TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.