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What is a perpetual inventory system? A perpetual inventory system is a method of accounting for inventory that immediately records a sale or another purchase through the use of a computerized point-of-sale system.
In contrast to the periodic system (which relies on occasional physical inventory counts), the perpetual system reports inventory movement of transactions and provides up-to-date inventory quantities at any given point.
This method is generally considered more efficient, including:
Nevertheless, businesses that don’t handle many orders, such as car dealerships, sometimes choose to use a periodic inventory system.
The potential downside to the perpetual inventory system is that it may gradually diverge from actual inventory levels. The reason it does this is due to unrecorded transactions or potential theft. As an added precaution, you can periodically compare book balances to actual on-hand quantities and adjust accordingly.
While already touched on briefly, let’s get clear about the differences …
A perpetual inventory system records real-time transactions of received or sold stock through the use of technology. Each time a transaction is made, the system updates all the relevant information to the company’s accounting system.
A periodic inventory system, on the other hand, relies on staff to undertake regular audits of stock to update inventory information. This usually involves physically counting the inventory available in storage, and comparing the outcome with sales data to check for discrepancies.
Keeping up with data in real-time
By continually recording sales, returns, discounts, and other miscellaneous transactions, all relevant stakeholders can have access to important data at any time. This allows businesses to keep up with demand and make necessary adjustments as more information becomes available.
Leaving a digital paper trail
As a general rule, the more information that you can compile on your business, the more detailed the paper trail, and the better decisions you’re able to make in the long run.
Adopting a perpetual inventory system records interactions that are useful for demand forecasting and other performance indicators down the line. Information like stock quantity and availability is integral because you must ensure that stock-outs don’t happen.
Lowering the cost of inventory management
Moreover, perpetual systems allow managers to track information against physical inventory for discrepancies. Although occasional physical inventory checks are still good practice — particularly to check for theft, spoilage, and possible human errors — there is no need to do daily checks. Thus saving staffing costs.
It’s also a system that saves time as staff no longer have to conduct tedious inventory counts every day to determine the amount of stock available.
Investigating stock level discrepancies
Under a periodic system, the year-end inventory balance is typically adjusted to match the results of a physical inventory count. As a result, it’s easy to discount theft, shrinkage, or counting errors because the physical inventory count total that is used as a reference to account for the cost of goods sold.
When your process has largely been automated and cleaned of prone-to-error manual inputs, your stock-taking techniques should take into account the work that’s been automated for you and focus instead, on discrepancies.
Of course, the reality is that problems like stock damage, spoilage, loss, or theft can all contribute to mismatches in number. Decide how much discrepancy you’re comfortable with and plan accordingly.
Demand forecasting to grow your business
Spreadsheets are a great tool for giving snapshots of your present inventory situation. As your business grows, however, forecasting becomes an integral aspect of managing your inventory and overall strategy.
For retail and wholesale businesses that see seasonal fluctuations in demand, being able to access historical information on sales and inventory help purchasing decisions in the future.
Many business owners are concerned about the upfront costs associated with implementing a new system.
This is a valid concern. Traditionally, enterprise resource planning systems (ERPs) can be expensive and difficult to navigate, requiring training sessions that are an additional drain on resources.
However, it’s a myth that analytics costs tens of thousands of dollars — restricting their use to large companies with more resources. With the plethora of cloud-based technology and SaaS solutions available on the market today, even the smallest companies have access to forecasting technology.