Physical Inventory: Steps, Best Practices & Tips

By Team TranZact | Published on Aug 3, 2023

Physical inventory is the process of physically counting and checking the number of items or assets a company keeps. It is important to ensure accurate financial reporting and effective inventory management. In this article, we will discover various aspects of physical inventory count, its best practices and tips, and how it helps maintain accurate account records.

What Is Physical Inventory Count?

A physical inventory system, also known as a stock count system, is a method businesses use to verify their physical inventory thoroughly and methodically. The basic physical inventory system definition is a count of the goods in stock. Counting, weighing, and measuring objects, as well as requesting counts of inventory items entrusted to other parties, fall under this process.

When a corporation maintains inventory records for each item in stock, the physical counts are compared to the recorded balances, and the recorded amounts are adjusted to reflect the physical counts.

The Four Types Of Physical Inventory

Inventory counts are classified into four types: manual, electronic, cycle counting, and full inventory counting. The methods differ, but choosing the appropriate one can mean the difference between positive and negative statistics for your business in the physical inventory posting process.

1. Electronic Counting

This method counts inventory by using scanners, RFID, barcodes, or mobile devices. It greatly decreases counting errors and increases accuracy. However, more time and resources may be required to finish the counting process.

2. Manual Completion

Manual completion requires recording inventory on paper count cards or sheets using pencils. It has a low material cost but a high error rate due to manual data entry.

3. Cycle Counting

At any one time, staff counts random chunks or rotating inventory sections. It reduces the time and resources required for counting, and businesses can continue operations during counts. Depending on the cycle counting method, some businesses may count inventory less frequently than desired.

4. Full Inventory

This strategy involves switching staff or bringing in temporary workers to count all items. It maintains accurate inventory data for annual financial reporting. It may, however, need an operational closure and is labor- and time-intensive.

Physical Inventory vs. Cycle Counting

A physical inventory process, such as in SAP MM involves a thorough, consistent annual count of a company's stock on hand. The cycle counting method is a more systematic way of counting stock portions.

Companies may undertake cycle counting as frequently as daily, and it is recommended that it be performed at least quarterly. It is not always possible to automate physical inventory. However, cycle counting is usually automated.

Benefits of Doing a Physical Inventory Count

The following are the benefits of doing fixed asset physical inventory procedures:

1. Improved Profitability

Physical inventories help to increase overall profitability. Identifying and categorizing old inventory allows for focused marketing and speedy sales, lowering liability and break-even points for suspect products.

2. Loss Prevention

Physical inventory counts help find and plan for losses, whether from theft or damage. Finding losses early lets us act properly, reducing the risk of having damaged goods.

3. Accurate Inventory Records

Physical inventory counts aid in maintaining accurate and up-to-date inventory records. It allows for more accurate forecasting of sales and purchases, making sure that the appropriate amount of product is accessible when needed.

4. Customer Satisfaction

Keeping inventory levels updated helps to fill customer orders quickly, avoiding delays and stock shortages. Fast service is important in our speedy economy to keep customers happy.

Issues With Physical Inventory

The primary issue regarding physical inventories is that they consume a lot of time and resources. Some businesses shut down sections or all of their activities to conduct a physical inventory. When this happens, they risk providing bad customer service.

Physical counts are often inaccurate due to staff mistakes or because new items are classified or registered inaccurately by internal or temporary staff members. Regardless of accuracy, there are some items that workers should not count during the physical inventory. These include:

Receipts from suppliers received after the count's specified cut-off date
Any known thefts
Any known shipments that left the premises without invoicing

Tips & Best Practices When Preparing for a Physical Count

Best practices for preparing a correct physical count include:

Using scanners or other stock-counting technology
Choosing well-trained counters/workers
Immediate resolution of differences
Performing a mock count while preparing
Make sure that the cost of the item being added is not visible during the count

Purpose of a Physical Inventory Count

The purpose or the goal of physical inventory count is:

Physical inventories can assist managers in identifying any differences between their inventory management system reports and what things are in storage.
When businesses have precise inventory counts, they can plan for the upcoming year's orders more effectively.
An improper inventory means a business will report an incorrect cost of goods sold, gross profit, and net income. Accurate physical inventory count helps companies to provide accurate earning reports to their stakeholders.

How to Measure the Success of Your Inventory Management Practice By Type of Stock?

Track key performance indicators (KPIs) unique to each category to measure the success of your inventory management practices. In the case of raw materials, keep an eye on the inventory turnover ratio and stockout rate. Measure cycle time and WIP (work-in-process) inventory value.

Based on the fill rate and the value of the outdated inventory, evaluate finished goods. Track the fill rate for service requests for spare parts/service inventory. These KPIs can assist you in evaluating the efficiency, customer happiness, and cost-effectiveness of your inventory management practices for various stock categories.

Step-By-Step Physical Inventory Count Instructions

Before every scheduled inventory count, ensure the following steps in the physical inventory audit checklist are followed:

To estimate the count duration, list stock quantities. Pick a day when regular operations will be least disrupted and identify who will be in charge of counting, taking into account cost analysis and any temporary support.
Schedule training sessions covering counting methods and potential issues close to the count date.
To address any problems, notify suppliers and partners ahead of time.
Allow enough time to get count-related equipment such as clipboards, count tags, or scanners, as well as to test the performance of electronic counting equipment and prepare for any necessary maintenance or replacements.
Update inventory software and confirm that all employees utilize the most recent versions.
Examine the stockroom or warehouse, detecting any problems and addressing them beforehand.
Suspend inventory-related operations until the count is finished, and the physical inventory verification should be followed. Print the final list before the count to catch any last-minute updates.

The Physical Inventory Counting Process

Counting physical inventory involves the following steps:

Allocate maps, inventory printouts, and equipment to individual staff members.
Staff members carry out counts of their assigned inventory items.
Staff members complete spreadsheets or count tags to document the counts.
Staff members submit the completed spreadsheets or count tags to managers.
Inventory systems are updated with the collected data by managers.
Managers compare the counting data with the existing system data.
Managers cross-reference the data with product and pack reports.
Managers assign staff members to examine any errors identified.
Staff members either recount or provide justifications for the identified errors
Staff members submit any necessary data changes to managers for review.
Once managers validate the count data, they forward it to the accounting department.
The accounting department conducts an audit of the inventory count data.
The accounting department approves the inventory count.
Managers lift the inventory freeze and resume normal operations.

Streamline Your Physical Inventory Count With TranZact

A physical inventory count is essential for maintaining accurate inventory records and optimizing inventory management practices. TranZact helps businesses improve accuracy, prevent loss and optimize inventory levels with its ERP inventory management software. It allows firms to maintain proper inventory control and improve overall operational efficiency.

FAQs on Physical Inventory

1. How frequently should organizations perform a physical inventory count?

Physical inventory counts should be performed annually, quarterly, or monthly depending on the firm's specific demand.

2. Can businesses choose partial physical inventory counts over full counts?

Yes, firms can perform partial physical inventory counts, concentrating on specific sections, product categories, or high-value goods. This method can reduce disruptions and the time and resources needed for a complete inventory count.

3. Can firms use technology to make the physical inventory count process more efficient?

Yes, firms may use technology to simplify the physical inventory count process. Inventory management software, barcode scanners, and RFID tags help automate data collection, increase accuracy, and provide real-time visibility into inventory levels.

4. How do physical inventory counts assist firms in preventing shrinkage or loss of inventory?

By finding differences and exploring their causes, physical inventory counts help organizations identify and prevent inventory wastage or loss.

5. What role does data analysis play in improving inventory management by using physical inventory counts?

Data analysis allows firms to get insights into inventory accuracy, discover patterns, and make informed inventory management decisions. It can identify areas for improvement, optimize stock levels, and improve inventory control practices overall.