Perpetual vs. Periodic Inventory Systems: Which One Is Right for Your Business?
Inventory systems help owners align their stock with product demand. There are two traditional methods of calculating inventory: perpetual and periodic.
There are benefits and downfalls of each system; keep reading to find out what they are so you can make an educated, informed choice for your business.
According to Kenneth Hamlett at Chron, the perpetual inventory system is the most popular choice for modern businesses.
This system was created when customer transactions could be completed with a digital scanner, which sends information about every sale directly to a central computer. When a product is sold, the computer system knows that there is one fewer item in the businesses inventory, and it can deduct that amount from the total number of products in stock.
This method requires computer software, such as Fishbowl or InFlow, for owners to access details about their inventory. The proper software can alert owners when product amounts are low, or it may even order items automatically. Once it is operational, this method helps prevent human error and keeps a continuous count of every item in stock.
The drawback to perpetual inventory, as Hamlett points out, is the initial startup cost. In order to work correctly, multiple scanners, computers, and software must be purchased before any sales can be calculated. There are also barcode expenses, which must be placed on each product, and time spent when initially entering the business’s products into the computer system.
Periodic inventory is a non-continuous process that relies on a purely manual process to track sales and returns. Every week, month, or year—depending on the owner’s choice and type of business—staff measures the count of items sold against the number of items previously listed in the inventory. At the end and beginning of each period, businesses that use the periodic system will know exactly how many items are in stock.
The advantage to periodic inventory is that the start-up costs are minimal. Everything can be completed with pen and paper, so no computers are necessary. The greatest drawback, however, is the effort required to maintain an accurate inventory while not knowing exactly how many items are in stock at any one time. Item counts completed each week, for instance, can absorb a lot of time that could be better spent on other tasks.
A Mixed Method: Using Both Inventory Systems
Business owners can benefit by employing the benefits of both inventory systems. The perpetual method, once established, is superior in many respects, but owners may also desire to manually check their stock once or twice a year, to make sure that actual product counts are in line with the electronic count.
Items that are misplaced, lost, or stolen won’t be recorded within the electronic system, but the amount of products on hand is still important when considering how owners will best meet the needs of their customers.
For almost any modern small business, using a mixed method may be the best way to ensure inventory counts are current and reliable. However, a business does need to have cash on hand to purchase the needed software and electronic components to support the perpetual inventory aspect. While costs is certainly a factor, an inventory system is not something to skimp on. Business owners should take the time to research and find out which software will work best with their style of business. A relatively small investment now can go a long way toward creating a profitable future.