Article > What is Physical Inventory and When to Count it?

What is Physical Inventory and When to Count it?

Two people walking down a warehouse aisle looking at a handheld device to count physical inventory.

Every warehouse needs an inventory system. Items move in and out of the warehouse so quickly, since there is a steady stream of purchases and new shipments. Your business must keep accurate inventory records for accounting and tax purposes. Keeping track of the stock levels of your products is also good for the company’s bottom line. It helps you make a better decision about new orders, based on previous sales revenue.

What Is a Physical Inventory Count?

In a physical inventory count, companies stop operations so that their employees can count how many of each item of merchandise is present in the warehouse. Depending on the size of the warehouse, you might do a physical inventory count of the entire warehouse over the course of several days. For the biggest warehouses, this is not feasible. It is more practical for large warehouses to suspend operations temporarily in one section of the warehouse at a time, while work continues in the other sections. Cycle counts are a physical inventory process where you measure the inventory levels of individual sections of the warehouse, instead of the warehouse as a whole.

Purpose of a Physical Inventory Count

If you have software that provides an automated inventory management system, do you still need to do a physical inventory count? For the best possible inventory accuracy, the conclusions reached by the human counters and by the software should corroborate each other. Using physical inventory counts in conjunction with continuous automated inventory is the best way to prevent inventory discrepancies and correct them quickly when they occur.

When Should You Count Physical Inventory?

You should count physical inventory at least once per year. The law requires publicly traded companies to provide annual reporting about their inventory. Even if your company is not publicly traded, you still need an accurate inventory count at least once yearly for tax reasons. Some companies should take inventory more often than that, though. For example, a distribution center should do a physical inventory count at least once per quarter, even if it has high-powered inventory software. Doing this will help you make better decisions about your budget and about your supply chain issues.

When is a Physical Inventory Usually Taken?

Physical inventory is usually taken when the warehouse is not otherwise in use. For example, you would not do a physical inventory count in a factory while the assembly line is actively running. Even the most organized people cannot do an accurate physical inventory count while they are busy with other tasks. You might need to bring in teams of temporary associate workers to do a physical count of all the materials. They can work section by section, minimizing the amount of time that the permanent workers’ work operations will be interrupted.

Methods for Counting Physical Inventory

The four main methods for counting physical inventory are manual counting, electronic counting, cycle counting, and full inventory counting. Which method you should choose depends on the layout of your warehouse and how your goods and SKUs are organized. You should plan to do a physical inventory of some or all of your inventory items, depending on how much you can afford to interrupt workflow. If your warehouse is already suffering from accounting discrepancy problems or inventory shrinkage, then any kind of physical inventory you can do now instead of later will provide numerous benefits. It will give you insights on how to prevent loss of goods and obsolete inventory that you must sell at a discounted price.

The Physical Inventory Counting Process

Even if you routinely use software with robust inventory tracking capabilities, sometimes it is worthwhile to do a manual inventory count. This method of taking physical inventories is as old school as it sounds. The employees in warehouses simply record, with pencil and paper, every item on the shelves. They stick a ticket with a number on every box they have counted. To count small items, they take the cases of items off of the shelves and sort them in bins after recording their inventory data on the list. Users should use this inventory method in addition to your usual inventory app because it always carries the possibility of human error. Automation is an ideal team member to collaborate with humans and vice versa.

Types of Physical Inventory Often Counted

No matter what types of goods you keep in storage, you should regularly do a physical inventory to prevent theft and identify the causes of waste. This is true whether your warehouse stores raw materials or the finished article to ship to customers. From food to smartphones, you need accurate figures about which things are in your warehouse and how many you have of each. If your warehouse holds works in progress, then your goal is to keep track of the number of units of supplies in each of your warehouses. If yours is a maintenance, repairs, and operations (MRO) warehouse, then your assets are in the form of tools and replacement components for machines and vehicles. It is important to take inventory of these, too, even though there is a difference between the responsibilities of MRO warehouse managers and the managers of other types of warehouses.

Physical Inventory vs. Cycle Counting

Some warehouse managers choose cycle counting instead of counting the inventory of the entire warehouse all at once. Several factors influence this decision. It is easier to accomplish cycle counting if your warehouse already uses ERP software. In this instance, you can plan for which areas of the warehouse to inventory well in advance. Cycle counting enables you to continue receiving shipments of boxes to other parts of the warehouses beside the one where you are doing the cycle count. When you have the right software, you can do a cycle count without worrying that it will interrupt your workflow every time a warehouse employee scans a barcode or makes a transaction.

Challenges With Physical Inventory Count

As you can imagine, counting every piece of every type of stock in your warehouse is a big job. However, this reason should not serve as a basis for procrastinating the physical count. Doing a physical count is always better for the health of your business in the short term and in the long term despite the inconvenience doing a physical count can cause. In order to accomplish the physical count accurately and efficiently, you might need to invest more money into software or in personnel on a temporary or permanent basis.

Tips & Best Practices When Preparing for a Physical Count

If you are doing a physical count at all, you are doing something right. Now it is just a question of getting the maximum benefits from the inventory counting process. These are some tips to ensure that your inventory count gives your business the boost it needs.

Use Inventory Management Software

Inventory management software can help your warehouse operate more efficiently and productively. This is true in the case of physical inventory count, as well as in other warehouse processes.

Address Discrepancies Immediately

One of the purposes of performing a physical inventory count is to catch discrepancies early before they can cause heavy financial losses. Some members of your inventory team should have the sole task of investigating discrepancies as they arise.

Utilize Technology Like Scanners

When it comes to technology, less is more for the physical count process. Despite this, writing down every code on every item is very time-consuming. Barcode scanners make the physical count go more quickly without jeopardizing accuracy.

Choosing the Right Staff

Physical inventory count is a specialized skill. If you operate a small warehouse with only a few employees, you should train them thoroughly on the physical count process before the count begins. Larger warehouses should hire specialized warehouse counters for the annual count. If you do cycle counting on an ongoing basis, then counters should be a permanent part of the warehouse staff.

Key Takeaways

Every warehouse should do a physical inventory, even if only for the purpose of filing an accurate tax return. You should choose the method of physical inventory based on the size and workflow of your warehouse.

Physical Inventory FAQs

These are some common questions warehouse managers ask about the reasons and methods of physical inventory.

How Do You Take Physical Inventory?

To take a physical inventory, you stop operations in one part of the warehouse, or even in the entire warehouse. You count every item and record it. Then you use this data for accounting and tax purposes, or to make future purchasing and sales decisions.

Why Are Physical Inventory Counts Important?

Physical inventory counts are important because the law requires them for publicly traded companies. They are also important for preventing theft and reducing waste, making your warehouse more efficient.

Is Physical Inventory a Debit or Credit?

Physical inventory is a debit because it counts as a current asset.

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