Chances are, you are already using a system of inventory management and stock-keeping, and are probably unaware of the technical aspects of doing so. When you account for your inventory, you want the values to be as accurate as possible. Having accurate numbers to work with can help you forecast better, plan your future sales and clear inventory more efficiently. This is the context in which periodic and perpetual inventory system comes into the picture.
For a very long time, periodic inventory tracking was the only way to account for inventory. After a while, inventory management teams began keeping track of orders as accurately as possible.
However, today, perpetual inventory systems exist on a whole different level. Software products have the ability to track inventory in real-time, every day and every night and without a break. Moreover, they can also track and update inventory across multiple sales channels and automatically send this data to integrated accounting software.
But first, how is a perpetual inventory system different from a periodic inventory system?
What Is a Perpetual Inventory System?
Perpetual inventory system uses computerized POS terminals and integrated inventory management software to update inventory ‘perpetually’ into the books of account. This method of accounting is extremely accurate, thorough and up-to-date because every order is recorded into accounts in real time.
Primaseller is a perpetual inventory system. It integrates with all offline and online sales channels to track inventory. Because it is integrated with QuickBooks Online, Primaseller can also update this data in real-time in your books of account, leaving no margin for delays and human error.
What Is A Periodic Inventory System?
In this system of inventory tracking, updates are made on a periodic basis, usually within set time intervals. For example, retailers may choose to update the records every week, at the end of a working day, or even longer such as a month for businesses that move lesser inventory.
The actual updating of the books of account may follow an even longer time period, such as a full year. Periodic inventory systems take into account the cost of goods sold over a period of time rather than as a unique attribute of each product being sold, leading to less accurate results when reporting revenues.
Perpetual Inventory System vs Periodic Inventory System
Degree of Sophistication
Without a doubt, a perpetual inventory system is the more sophisticated of the two. Sophisticated systems keep it up to date, and the records are as accurate as possible. This is important for businesses that turn or expect to turn large volumes of inventory. However, for businesses that handle lesser inventory such as a car dealership, a periodic inventory system can serve the purpose just fine.
Accounts and COGS
A perpetual inventory system updates the inventory ledger in accounts with every order. Thus, books of account accurately reflect the costs and profit of selling each product. In a periodic inventory system, you calculate the cost of goods sold only when you count the entire inventory. This may lead to approximations that aren’t always accurate.
The need for systems and software
It is almost impossible to follow a perpetual inventory system without using automation to some degree. Else, you’d be dedicating entire teams to managing and updating inventory alone. However, you can run a periodic inventory system with manual intervention alone. Traditionally, retailers have considered such systems as being expensive but today, subscription bases services make them accessible and scalable solutions for all businesses.
Stock reconciliation is easier when you use a perpetual inventory system because the book values reflect the actual status most accurately. In a period system, even if employees skip making one entry, the ramifications can continue to affect your inventory and sales for a long time.
When you compare both systems objectively, you will see that a perpetual inventory system works better even for small to mid-sized businesses. What’s more, when you choose to scale up, you have a lot to gain from such a system.
Advantages of the Perpetual Inventory System
Lower The Cost Of Inventory Management
The most obvious benefit of using a perpetual inventory system is also one that you’ll find counterintuitive at first. After all, most planning and management systems are traditionally known for being cumbersome, needing extensive training and being expensive overall.
However, that situation has changed drastically in retail. For one, today’s inventory management systems are built to work on any device. They are easy to navigate around and integrate with multiple sales channels. The learning curve on these solutions is not too steep. What’s more, a periodic inventory system demands immense manpower. Automated systems, on the other hand, work just fine without as many people. Subscription-based models make the choice even easier.
Forecast Demand More Accurately
As a retailer, you want to be able to forecast demand accurately. While spreadsheets are good enough for records, it is very hard to see trends in them over time. Moreover, a spreadsheet only responds when you design it to work a certain way.
However, a perpetual inventory system is a far more accurate reflection of your past and current business performance. Access to such rich historical data can help you make the right forecasting decisions. This is particularly useful if you sell products that have seasonal/ periodic variations in demand.
Find Errors In Stock Levels Faster
If you have ever reconciled stock, you know the pain of never knowing where all of that stock disappeared. Was it just wrong records or did it get stolen? This is one of the greatest pitfalls of using a periodic inventory system.
On the other hand, a perpetual inventory system keeps track of stock in real time. This also means that you can record your stock’s movement into, within and out of the warehouse more accurately. As a result, when you conduct a stock reconciliation exercise, you are less likely to find glaring errors. If you write off large numbers, you can easily figure out where the differences came from.
Have Access To Real-Time Data
With a perpetual inventory system, you have access to information on every sale, every discount and every return your business ever processed. Needless to say, that information is valuable. It lets you spot demand fluctuations sooner, or allows you to make purchase decisions.
For example, you now notice product returns trends faster. This information allows you to evaluate that specific vendor, run a check on all of their products and fix your system before the complaints start pouring in.
In retail, it is always easier to fix the system first than to plug a leak later. Real-time data lets you do just that.
Which inventory system have you been using so far? What concerns do you have about moving to a perpetual inventory system?