Inventory is the lifeblood of your small business, necessary to grow your company and make a profit. But how do you successfully manage inventory? There are two main types of inventory systems that you can choose from. The perpetual inventory system keeps an ongoing record of your company’s inventory balance, while the periodic inventory system records the amount at established intervals. Although both systems work, you should keep their differences in mind when choosing which one is best for your company.
Perpetual Inventory System
The perpetual inventory system constantly maintains the amount of inventory you own and sell in real time. The greatest benefit of this system is always having an accurate idea of how much inventory your company has on hand. At any time, you’re able to check your balance sheet, see the total dollar amount of inventory, and know how much you have on hand. Another advantage of a perpetual inventory system is its automation. Because you always maintain the inventory level, your accounting system automatically counts and reconciles inventory.
A drawback of the perpetual inventory system is the cost. Because you need software that communicates every purchase and sale, perpetual inventory systems are usually more expensive than other systems. Plus, there are ongoing maintenance costs to consider to ensure the inventory system runs correctly.
Periodic Inventory System
A periodic inventory system is a method of occasionally counting inventory. The financial statements still track and report inventory but knowing the exact amount of inventory at all moments isn’t a priority. Instead, you reconcile inventory on a monthly or quarterly basis to reconcile business activities and identify possible obsolescence or theft.
The main benefit of a periodic inventory system is its simplicity. It requires less maintenance and is more affordable. On the downside, a periodic system requires a large effort and may even be a manual system. You can speed up a periodic inventory by using mobile inventory apps that integrate with Quickbooks. This means you have to count the amount in inventory at the end of each period, so you end up using your cost of goods sold in between. A periodic inventory system sacrifices a bit of quality and accuracy.
Advantages and Disadvantages of Inventory Systems
Choosing the inventory system that’s right for your small business typically comes down to two questions.
It’s beneficial for your business to consider whether you have a pressing need to know the inventory balance at all times. This may be very important in some industries, such as perishable food items inventory. Another factor to consider is security. If your goods are susceptible to theft or breakage, it may be wise to have stronger internal controls. When trying to secure loans or other financing, having real time, updated information can work to your benefit. As a business owner, you need to decide how much money you want to spend on an inventory system. A perpetual system costs more than a periodic system.
In cases where you want more security over your items, a perpetual inventory system immediately lets you know if something is unaccounted for. Because a periodic inventory count may not happen for an entire month, your response time is usually slower. Consider what the task of counting your inventory looks like. Do you have many unique items, or do you have thousands of small items? Are your inventory items valuable, or would miscounting one inventory item not make much of a difference? It’s just a matter of deciding which of the two methods works best for you.
It’s a good idea to keep a close eye on your small business’s inventory as well as other key factors. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.