What is the Difference Between Perpetual Inventory and Physical Inventory?

Is perpetual or physical inventory the best method for your business? Knowing the difference between the methods, how they compare, and how they affect your processes will help you make the right decision.

How do perpetual and physical inventory compare?

Keep in mind that neither perpetual nor physical inventory eliminates the need to visually inspect items and ensure they aren’t damaged, spoiled, or stolen. But there are differences in the technology you’ll need, the data you’ll receive, and the cost of inventory management systems.

Perpetual inventory

• Technology – Perpetual inventory is impossible to keep track of manually. It requires automation, and advanced software is available to help you do it. You can either enter or scan your goods into the software.
• Data – It provides a real-time accounting of your goods—wherever they are in the process. If items are bought, sold, discarded, or moved to another location, you’ll instantly see it and understand what happened. Every transaction—quantity and cost—is updated automatically.
• Cost – Depending on the size of your business and the technology needed to track its inventory, setup costs vary from minimal to high.

Physical inventory

• Technology – You’ll establish a schedule to periodically count each item in the inventory and record the results. You can create a record-keeping system. But easy-to-use accounting software is available to manually enter or scan inventory items and their cost into the software.
• Data – You’ll refer to your manual or automated records to compare previous and existing inventory. You can choose the detail you want to track as items are bought, sold, moved, or discarded. If you use accounting software, it’s easy to run reports and compare data.
• Cost – If you keep manual records, setup costs are minimal. Fees for basic accounting software or apps are minimal to moderate.

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How can you decide which inventory method to use?

What factors can help you decide whether perpetual or physical inventory is right for your business?

Inventory size – The size of your inventory determines how much time it takes to manage it. It’s easy to count a small inventory manually, but counting a large inventory can be overwhelming. Anticipate your projected growth and plan for your long-term needs.

Business locations – Does your business have multiple locations—perhaps with goods exchanged between them? Weigh the pros and cons of physically tracking items at each site vs. using perpetual inventory with shared data.

Transaction volume – Is your business a startup, or is it established? Think about the number of your daily transactions and how frequently you need to access data about purchases, sales, and inventory status.

Budget – Calculate the cost of labor for periodic physical counts vs. a system that provides perpetual data.

Whether you choose perpetual or physical inventory, you don’t have to keep it strictly manual. You can research online and find a large variety of accounting and inventory software and apps. And you’ll find them at varying costs to fit your budget and help simplify your inventory tracking process.