What is Physical Inventory?

Physical inventory can accurately refer to two separate but related ideas, and the meaning is principally tied to whether the term is being used to refer to a thing or to a process of doing something. The physical inventory can often refer to the on-hand inventory of products found in a store, typically a retail establishment, and may also be referred to as real inventory or “on hands.” This inventory can also refer to the process by which the inventory in a store is counted to establish the quantitative value of the inventory itself.

The difference between the two uses of the word is basically whether the term is used as a noun or a verb. When used as a noun, the term is often used in retail to establish how much product is available to sell to customers. Since many customers will leave a store empty handed if they cannot find the product they are looking for, ensuring sufficient inventory in a store is important. The inventory is also commonly tied to stocking and shelf replenishment to ensure that products in the store are easily available to customers.

This is often in contrast to computer inventory, which is what records of shipments received and sales of items in the store indicate should be found in the store. Errors in shipping, theft, improper processes at the register, and other factors can all create a difference between the physical or actual inventory and the computer inventory. For many companies, the discrepancy between these two numbers is referred to as either shrink, for items with less physical inventory than computer inventory, or swell, when the actual inventory is greater than the computer inventory. Both are typically considered to be negatives, as they are often indicative of either company loss or poor performance by associates at some level.

When used to describe a process, physical inventory is typically done once a year or on a similarly regular basis. Depending on the size of the store, inventory counts can take only a few hours or several days and may be performed by employees of the store or outside contractors hired to perform the inventory. For larger stores, or for departments of stores that are especially popular with customers or more likely to be targeted by shoplifters, daily or weekly counts may also be performed as a part of ongoing physical inventory.