What is a perpetual inventory system?
There are two primary inventory management systems that businesses use: a perpetual inventory system or a periodic inventory system.
We’ll go through the features of both systems and outline why most small and medium sized businesses should transition to a perpetual inventory accounting system – and why the prospect of migrating is not as daunting as it may sound.
How does a perpetual inventory system differ from a periodic system?
A perpetual inventory system is a method of inventory management that records real-time transactions of received or sold stock through the use of technology – generally considered a more efficient method than a periodic inventory system. Each time a transaction is made, the perpetual inventory system should update 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 – which usually involves physically counting the inventory available in storage, and comparing the outcome with sales data to check for discrepancies. This is an enormously time consuming task, particularly for businesses that deal with large volumes of stock. Nevertheless, businesses that don’t handle many orders, such as car dealerships, may be better off using a periodic inventory system.
Here are some ways of forming good habits early by tracking information for your business:
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 real-time demand and make necessary adjustments as more information becomes available. This is particularly important as a business becomes more complex.
Leaving a 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 it is for decision making 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 stockouts don’t happen.
Lowering the cost of inventory management
Moreover, a perpetual inventory system allows 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, 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 inventory 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 it’s the physical inventory count total that is used as a reference to account for the cost of goods sold. In contrast, a perpetual inventory system will allow you to investigate any discrepancies and make any necessary stock adjustments.
Demand forecasting to grow your business
Spreadsheets are a great tool for giving snapshots of your present inventory situation. As your business grows, however demand forecasting becomes an integral aspect of managing your inventory and overall strategy. For many retail and wholesale businesses that see seasonal fluctuations in demand, being able to access historical information on sales and inventory can help make good 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. 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.