When you started your business, you likely had very different inventory management needs. Maybe you started off with a few products, then grew into new markets and verticals. Along the way, you might have gone from keeping inventory in your garage to using a storage locker, and then finally moved into your own warehouse.
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. Accurately accounting for inventory with a handful of SKUs is a vastly different job than accounting for hundreds—or hundreds of thousands.
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.
What is periodic inventory?
Periodic inventory is an inventory valuation method where a company performs a physical inventory count at the end of an accounting period, typically by scanning barcodes. Since physically counting every object in your inventory is extremely time-consuming (and costly, when you factor in the necessary labor), most businesses conduct only one every year.
It might work well for small businesses with a low number of SKUs and a small amount of products, but it’s too much manual labor for a larger organization. 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.
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 if you’re way off.
Perpetual inventory systems have tried to address these challenges by using technology to help companies gain more insight into sales transactions and 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, so you can understand how much stock you have on hand.
Driven by a point-of-sale system (POS), a perpetual inventory system automatically updates your inventory levels using sales data. When an item is sold, the inventory totals are updated in real time.
Transactions recorded in perpetual inventory systems include:
– Inventory purchased or received
– Goods sold from your stock on hand
– Decommissioned inventory (expired or out of season)
– Goods used for production
Benefits of perpetual inventory
Companies that invest in perpetual inventory systems can benefit in a few ways, including:
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.
Make more informed decisions
When you have real-time insight into key metrics like the cost of goods sold (COGS), you can make decisions that positively impact the financial health of your company.
Create more time for innovation
Instead of frequent manual counting, employees can devote their time to higher-value activities.
Gain a faster understanding of ending inventory
Ending inventory, which is the final value of goods still for sale at the end of an accounting period, is a key metric for your business’s financial health. Instead of waiting until a manual count is performed, as with a periodic inventory management system, you gain this insight immediately.
Understand and track defective inventory
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 removed from your stock and safely disposed of.
3 ways to save time with a perpetual inventory system
By now, it’s probably pretty clear how much time you can save when you have access to real-time inventory information. But business owners benefit from closely keeping track of inventory in other ways, too.
Faster planning and forecasting
Instead of waiting for the end of an accounting period to perform planning tasks, you can plan for next season in advance thanks to accurate insight into stock levels.
Although no system is perfect, inventory management software in combination with a perpetual inventory accounting system can provide you with more accurate recordkeeping.
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.
Combined with a strong accounting ecosystem like QuickBooks, a perpetual inventory management system can make life as a business owner easier. QuickBooks can help you establish a financial foundation for your business to help you achieve your goals, faster.
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