In any business, inventory is very important! A business needs inventory to meet the customer's need but inventory shall not be in too much quantity neither it should be in less quantity. However, a lot of people think that perpetual inventory is the best choice and others believe physical inventory is the best option.
In this blog, we will know the difference between perpetual inventory and physical inventory! But first, let us know their basic definitions!
What Is Perpetual Inventory?
Perpetual inventory is one solution for inventory accounting. It records the sale and purchasing inventory through an inventory management system. Perpetual Inventory also provides information in real-time. It enables you to update stock records so that out-of-stock situations do not occur.
In simple words, whenever a sale or purchase occurs it keeps updating records in real-time.
For example, a clothing store may use perpetual inventory as they need to keep the information updated in real-time so that their customer finds the required dress.
Whenever stock arrives, the database added stock into available inventory, and whenever stock is purchased, the stock is removed from the database.
So, employees are updated about the inventory precise numbers. It helps in avoiding customer disappointment.
Also Read: What Is Inventory Audit? Its Purpose and Benefits Explained
What Is Physical Inventory?
Physical inventory is the process of counting inventory physically. It is done to keep track of the inventory cost of what is sold and what is purchased. The process of physical inventory also helps in finding the expired, broken inventory.
Furthermore, it also helps in finding the actual numbers of inventory as mentioned in the automated software. As it has been seen that inventory numbers in automated software are manipulated. So physical inventory count helps in identifying that.
Physical inventory checking also verifies what is ordered and what is delivered and what is the quality of the product.
What Are the Differences Between Physical Inventory and Perpetual Inventory?
The difference between physical inventory and perpetual inventory are discussed below:
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1. Perpetual inventory requires an automated process whereas physical inventory is a manual process.
2. The perpetual inventory provides real-time information and updates regularly whereas physical inventory does not update regularly it is done after a particular period of time defined by the manager (Weekly, monthly, etc.).
3. Physical inventory is a good option for small-size organizations as they can keep track manually but they need to move on to perpetual as their size grows.
4. Physical inventory is a long process but it is more accurate whereas perpetual inventory is a real-time process however it is not accurate all the time as it can be affected by theft.
5. Cost in perpetual inventory may vary from small business to large business plus there are several other factors also that impact cost such as technology used in asset tracking and so on. On the other hand, physical inventory cost is minimum when you are doing manual work.
Inventory management is very important for all organizations as it can impact your bottom line. According to Global Market Insights, “Inventory Management Software Market size crossed USD 3 billion in 2019 and is estimated to grow at a CAGR of over 5% from 2020 to 2026.”
When you are a small size organization you can work manually utilizing the physical inventory. But when an organization grows then organization need to shift their manual process into an automated process. But it does not mean that physical inventory should be eliminated. It must be used regularly as it helps in comparing numbers with the software with physical counts.
Moreover, you can use inventory management software for better outcomes. It has several features that are helpful in effective inventory management such as re-ordering, notification alert features.
It provides real-time information that helps in making good business decisions. Solid information is important in inventory management, good business decisions cannot be taken on assumptions. Inventory management eliminates human error by automating the process.
Furthermore, inventory management software keeps track of data that assist in tracking trend so that business grows. It saves from overstocking and understocking issues which are actually a big problem in inventory management.
When you have huge warehouses finding the required inventory is not a simple task. A lot of time is consumed while looking for inventory. Inventory management software provides complete visibility of inventory. Therefore, you can easily find inventory with asset & inventory tags that are attached to inventory.
If you want to grow your business and solve your inventory problems then you must invest in inventory management software. It has the potential to solve your business problems and take your business to new heights.
Also Read: What Is the Difference Between Periodic and Perpetual Inventory?
Frequently Asked Questions (FAQs)
1. Why overstocking and understocking are major problems? How to avoid them?
Overstocking means purchasing more than the required reason can be discount price, analyzing trends, etc. However, you are not able to sell or finish the inventory. As a result, business loss occurs.
Under stocking means when you do not have inventory to sell or consume. This also leads to business loss. E.g., a customer comes into your shop and did not found the required product so potential customer loss occurred and customer disappointment also occurred.
You can easily avoid both issues with inventory management software with its re-order feature.
2. What is re-ordering in inventory management?
Re-ordering is one of the most important features of inventory management. Re-ordering allow the organization to re-order inventory before your business running out of inventory.
With the help of inventory management software, you can easily avoid the stock-out issue. This software alerts the team about low stock and you can also set a re-order point. Whenever inventory goes below that level it will alert the team and the responsible person will start the re-ordering process.
3. What is the difference between perpetual inventory and periodic inventory?
Perpetual inventory keeps track of inventory and updates inventory whenever a sale or purchase occurs. Whereas periodic inventory counts inventory occasionally. This is the major difference between perpetual inventory and periodic inventory.