Annual Physical Inventory is the process of personally checking the stocks to ensure appropriate accounting of the materials and physical existence of the same as recorded in the company books. This process helps the business to understand the accuracy of the company stock.

It helps in planning the delivery of goods to the customers on time. It also further enhances the inventory management system by tracking the existing materials and also understanding which ones need to be ordered for a smooth and non-stop production.

Thus the overall business decisions are taken with the help of this process.

This process suites for small and medium organizations with fewer products. This process will not be suitable for large organizations with more products in inventory. Because they cannot shut down for a long time for physical inventory. Annual physical inventory to be done once a year.

Following are the few important steps to perform annual physical inventory process

  • Assign at least two people to do this process. An experienced, familiar with the warehouse person to count and another one to record the quantity
  • Schedule date for the process and inform all the staffs 
  • Divide the process of counting to make it more appropriate
  • Record the counts properly to avoid double count
  • Utilize this time to clean your warehouse and organize it
  •  Record the procedures that you have followed during the process

Advantages of annual physical inventory

  • It allows the organization to start a fresh new year with a clean warehouse
  • It ensures the accuracy of  inventory of the organization and makes sure that  goods are not being lost
  • It gives useful information about the stock of the organization

Disadvantages of annual physical inventory

Time-consuming: Even though there are several benefits of using the Annual Physical Inventory, the biggest issue of this process that it takes a lot of time for the personnel to individually count and check every item. It also unnecessarily adds up to the manpower costs that are lost in actual production and the same time is invested in checking the stock.

Chances of inaccuracy: no company can perform this activity often. This might be done once in every quarter or a year. Once the stock is checked it is adjusted as per the existing records. But the important point is that during the rest of the year the inaccurate data prevails which makes this system not very efficient. The Annual Physical Inventory system comprises 3 most important phases being: planning, execution, and report analysis

The best-suited alternative to this procedure is the inventory cycle count where the materials are checked on a specific day for a specific location. This will ensure minimal disturbance to the production and suitable planning can be done accordingly to avoid any production glitches. ABC analysis can be utilized here to make counting more efficient and reliable.

Get more definitions about Annual physical inventory and other ERP related terms here.


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