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Guide to Perpetual Inventory Systems: Definition, Methods and Benefits

Published on June 6, 20244 min read

When you started your business, you likely had very different inventory management needs. As your product lines have increased and your supply chain has become increasingly complex, your old approach to inventory management may not be cutting it anymore. Switching from a periodic inventory system to a perpetual inventory system can significantly improve your inventory management strategy.

Read on to discover the difference between periodic inventory and perpetual inventory management and how the latter can help your business save time and gain more understanding into inventory levels.

In this article we’ll cover:

What is periodic inventory?
What is perpetual inventory?
Periodic vs perpetual inventory system overview
Benefits of perpetual inventory
Disadvantages of perpetual inventory
How to streamline your inventory with perpetual inventory management software

What is periodic inventory?

Periodic inventory is an inventory valuation method where a company performs a physical inventory count or a stocktake at the end of an accounting period, typically by scanning barcodes and recording stock-keeping units (SKUs) into stock sheets. Since physically counting every object in your inventory is extremely time-consuming (and costly, when you consider the necessary labour), most businesses only conduct a stocktake annually or twice a year.

Periodic inventory might work well for small businesses with a low number of SKUs and products, but it’s too much manual labour for a larger organisation. Additionally, periodic inventory is more prone to human error. After all, even the most detail-oriented employee can miscount or may not count inventory that isn’t in the expected spot. Learn more about how to conduct a successful stocktake with our stocktake preparation checklist.

In a periodic inventory system, you don’t have much insight into your inventory balance throughout the accounting period. The inventory balance only gets adjusted once the manual count is completed. In the meantime, you’re forced to estimate the cost of products sold, which could lead to a big adjustment at the end of the accounting period to account for errors and discrepancies in inventory tracking.

Perpetual inventory systems have tried to address these challenges by using tools such as digital barcode scanners and Excel spreadsheet templates to record inventory to help businesses gain more insight into inventory on hand.

What is perpetual inventory?

The perpetual inventory method is a real-time inventory management system that uses software to immediately record sales and automatically adjust inventory levels so you can understand how much stock you have on hand at all times. By integrating a point-of-sale system (POS) or connecting to e-commerce platforms such as Shopify or Amazon, a perpetual inventory system automatically updates your inventory levels using synchronised sales and order data. When an item is sold, the inventory totals are updated in real-time.

The following transactions are recorded in a perpetual inventory system:

Inventory purchased or received
Decommissioned inventory (expired or out of season)
Goods used for production
Goods sold from your stock on hand
Synced e-commerce sales data

QuickBooks inventory management software offers the following features of a perpetual inventory system:

Real-time inventory tracking
Low stock alerts
Organised supply chain and vendor information
Inventory valuation
Inventory reporting and analytics
Accounting integrations

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Periodic vs perpetual inventory system overview

Below is a summary of the key differences between periodic inventory systems and perpetual inventory systems.

Key Feature	Periodic Inventory System	Perpetual Inventory System
Inventory Recording and Updating Methods	Inventory is physically counted either manually or with the help of barcode scanners and entered into stock sheets, excel spreadsheets or a software each time inventory is sold and purchased by the business.	Inventory is automatically updated based on sales data from a POS system or ecommerce platforms connected to inventory management software.
Maintaining Optimal Stock Levels	You will need to actively monitor and update stock levels to ensure you have enough stock which can be time-consuming.	Consistently updated inventory levels allow you to monitor stock levels in real time to ensure optimal stock levels. Low stock alerts also allow you to reorder inventory and prevent stockouts.
Inventory Analysis and Reporting	It is more difficult to accurately analyse and report on inventory if you conduct a stocktake once or twice a year as the data may be out of date and contain discrepancies.	It is easier to analyse inventory and sales trends as inventory is continually updated. This allows for more accurate and routine reports that can assist with forecasting sales trends.
Calculating Cost of Goods Sold (COGS) Accounting	You will need to manually calculate the cost of goods sold as you update inventory levels and sales data. Updates to prices as a result of sales and discounts need to be manually accounted for which can increase the risk of error.	Perpetual inventory management software can auto-calculate the cost of each product sold using the first-in, first-out (FIFO) method. Updates to prices as a result of sales and discounts are reflected in the calculations as the system is synced with your POS or ecommerce store.
Accuracy	Physical counts are more prone to human error and increase the margin of error.	Assuming there is no theft or damage to inventory, perpetual systems that automatically update inventory are generally more accurate.

Benefits of perpetual inventory

Let’s take a look at some of the advantages of a perpetual inventory system and how businesses that invest in perpetual inventory systems can benefit.

Access to inventory metrics and formulas

Perpetual inventory systems provide real-time inventory records that can help you calculate inventory formulas to determine key inventory metrics allowing you to make more informed decisions about your overall inventory strategy. Here are some of the inventory formulas a perpetual inventory system can help you calculate:

Inventory turnover ratio: This formula calculates your inventory turnover rate to help you determine how much stock you sell in a given accounting period. Use our inventory turnover calculator to help you find your inventory turnover ratio.
Economic order quantity (EOQ): This formula can help you determine optimal inventory levels and minimum order quantities to help you reduce inventory holding costs or carrying costs. Learn more about how to calculate economic order quantity.
Reorder point: This formula helps you determine when you should replenish stock. Use our reorder point calculator to determine your inventory reorder point.
Cost of goods sold (COGS): Perpetual inventory systems such as QuickBooks can automatically calculate the cost of goods sold using sales data from POS and synced ecommerce apps. Learn the cost of goods sold formula and how to record COGS or simply use QuickBooks free COGS calculator.

Make more informed decisions

When you have real-time insight into key inventory metrics you can make decisions that positively impact the financial health of your business. Instead of waiting around for data from a manual inventory count to come in, business owners can check inventory records and generate reports that inform decisions in real-time.

Inventory reports based on up-to-date inventory records and synced sales data can provide insight into sales trends - such as best-selling items and those that aren’t selling - allowing you to forecast sales trends and ensure optimal order quantities when ordering stock to meet customer demand and avoid dead stock.

Prevent stockouts

As the retail landscape becomes more competitive due to online shopping, customers are increasingly frustrated to find bare shelves (or an out-of-stock page). When you gain real-time insight into how much inventory you have on hand, you’re better prepared to have exactly the inventory you need on hand.

Understand and track defective inventory to avoid dead stock

With a perpetual inventory system, you can track items individually. If a defective or harmful item is discovered, it’s easy to see how much of that product you have on hand so you can ensure it’s properly discontinued, removed from your stock and safely disposed of.

Increased accuracy and fewer errors

Although no system is perfect, inventory management software in combination with a perpetual inventory accounting system can provide you with more accurate recordkeeping. This will also lead to greater quality control, ensuring your customers receive the right products ensuring a positive customer experience.

Save time to focus on other aspects of your business

Instead of frequent manual counting, employees can devote their time to higher-value activities that will help you scale your business for success. Learn more about inventory management tips that can help you save time and manage your inventory more effectively.

Disadvantages of perpetual inventory

While perpetual inventory has many benefits, there are some disadvantages if the system is not used properly: For example, some disadvantages include:

Scanning errors: If items are not scanned or counted accurately during a stocktake, incorrect inventory levels may be recorded leading to inconsistent records.
Incoming stock may require manual adding: While inventory entered into a perpetual inventory system will be updated automatically based on sales, you still need to manually enter in newly purchased stock or incoming stock.
Costs: Perpetual inventory systems often have a monthly fee for continued use. However, a monthly fee may outweigh the cost of inaccurate records, overstocking and dead stock that can occur with periodic inventory systems.
Training: You may need to train your staff to use perpetual inventory software systems which may incur your business more time and cost. However, this will reduce the amount of time it will take to do stock takes and will increase data accuracy in the long run

How to streamline your inventory with perpetual inventory management software

Perpetual inventory management software like QuickBooks can help you streamline your inventory management processes and ensure you have access to updated inventory levels in real time. QuickBooks can synchronise sales data and inventory levels from the ecommerce apps you already use to help manage your ecommerce inventory.

Learn more about how QuickBooks inventory management software works and try a free 30-day trial to see how it can streamline your inventory.

FAQs

How does a perpetual inventory system work?

What are the benefits of perpetual inventory systems?

Perpetual inventory systems can benefit your business by:

Providing automatically updated inventory levels in real-time
Providing access to inventory metrics to help you make more informed business decisions
Preventing stock outs
Tracking defective inventory to avoid deadstock
Increasing accuracy and quality control to ensure customer satisfaction
Saving you time to focus on other high-value business operations

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