Perpetual Inventory vs. Physical Inventory: What Are the Major Differences?

Perpetual inventory systems and physical inventory systems attempt to keep businesses organized and provide them with data that can help them make accurate decisions and know the correct amount of available inventory. However, these different types of inventory systems achieve these goals through different means.

What Is Perpetual Inventory?

Perpetual inventory systems are methods of inventory management that keep track of inventory in real-time. The automated process allows users to see an accurate inventory count as it automatically updates it when a product is sold or received. The system uses sales and purchasing records to keep track of the inventory.

To implement a perpetual inventory system, businesses need to have a point of sale (POS) system and inventory software integrated with that system so they can accurately and automatically track inventory. With these capabilities, the system will not require any manual data entry.

Running a perpetual inventory system allows companies to use unique accounting applications through which they can run the total cost of products sold and compare that to the total cost of the remaining inventory.

Perpetual inventory systems give businesses specific insight into where in the process individual units are. The system can track products from the time they are received from the manufacturer until they are delivered to a customer.

The cost of a perpetual inventory depends on the size of the business and how much technology they already have in place.

What Is Physical Inventory?

Physical inventory requires a person to count all the inventory a business has rather than using automation. The stock they count is known as the quantity on hand — the stock a company has physically available to distribute to customers. Physical inventory systems vary depending on what is best for a specific company.

Cycle counting is when businesses regularly check to see if their current inventory matches their records by counting the inventory on site. Companies can use pen and paper, mobile devices, or barcode scanners. Whatever method a business uses, counting requires human effort and is subject to human error. Finale Inventory offers cycle count software that helps businesses be efficient and accurate through the counting process.

A business’s physical inventory should be taken in all of its locations. Often inventory is held in several locations, and it is important not to forget any of them to avoid discrepancies.

Because there is less technology involved, physical inventory systems tend to run at a low cost but take more time.

How Are Perpetual Inventory and Physical Inventory Different?

Perpetual inventory and physical inventory seek to achieve the same end goal but do so very differently. Here are the most significant differences between these two systems.

Human Involvement

One major difference between perpetual inventory and physical inventory is the amount of human involvement they require. Perpetual inventory is automated and only requires human involvement for the initial setup. Meanwhile, physical inventory requires humans to count the inventory repeatedly and then analyze and implement the data. 


Perpetual inventory systems are more expensive upfront because of the necessary technology. Physical inventory systems are lower cost upfront but require employees to take on added responsibilities by manually counting the inventory according to the schedule, increasing costs over time. 


An automatic process is naturally going to be faster than human processes. If speed is a concern for a business due to the size of its inventory compared to the number of employees, a perpetual inventory system may be the right solution.


Data from a perpetual inventory system may not be as accurate as data from a physical inventory system because of its scope and how quickly it tracks items. However, physical inventory systems are also subject to inaccuracy simply due to human error that goes unchecked, but a well-thought-out and organized system may lead to fewer errors than a perpetual inventory system.

Size of Organization

Another difference between physical and perpetual inventory systems is the size of the organization they can cover. Physical inventories are generally better for smaller businesses. Bigger companies may have a harder time implementing physical inventory systems but could if they are willing to hire extra help. Businesses of any size can use perpetual inventories since they can track large amounts of data and scale with a growing company.

How to Choose the Best Inventory Method for Your Business

Businesses should consider various aspects of their workflow when choosing an inventory method. Take these factors into account to select the best system for your company:

Inventory Size

Businesses should find the current size of their inventory and project what will change and how big it will get in the near future. A physical inventory system is best for a small inventory, as it will be less difficult for those counting. If a business has a large inventory or is growing, a perpetual inventory system can improve its efficiency.

Business Location

If a business has multiple locations, they should determine whether they are willing to risk missing or double-counting inventory if they choose a physical inventory system. A perpetual inventory system can track inventory between sites and share that data between the sites as well. 


Companies should consider their budget and determine whether they would like to pay more upfront or less upfront but more over time. A perpetual inventory system will cost more initially, while a physical inventory system will be cheaper at first but may require continual financial investment.

Transaction Volume

Businesses that deal with many daily transactions should consider an automated process to avoid errors. If a company like this chooses a physical inventory system, it may cause more strain since employees will need to count inventory more often. A business with a small number of daily transactions could lean towards a physical inventory system.

Streamline Your Operations With Finale Inventory Management Software

Finale Inventory offers solutions that will help you get the inventory system you need. Schedule a demo today to see exactly how our services would integrate into your workflow before you purchase. If you have any questions or concerns, please call us at 888-792-8891 or fill out our contact form and a member of our team will be with you as soon as possible.