What Is a Perpetual Inventory System?
A perpetual inventory system leverages a cutting-edge accounting method to update inventory changes in real-time through computerized point-of-sale (POS) systems, negating the need for frequent manual counts. This futuristic approach provides a meticulous overview of inventory levels, reflecting the current stock accurately.
Rather than maintaining detailed records manually, a company using this system records purchases as debits in the inventory database. Unlike a periodic inventory system, which relies on scheduled physical counts, a perpetual system continuously updates inventory records.
Key Takeaways
- Real-Time Tracking: Sales and inventory levels update instantly via POS systems.
- Elimination of Manual Count: Reduces the need for keeping item counts by human hands.
- Ideal for Large Businesses: Best-suited for companies with high-volume sales.
- Cost Efficient: Although periodic physical counts are still necessary, they occur less frequently and on a smaller scale.
Understanding Perpetual Inventory Systems
Perpetual inventory systems shine in their ability to prevent stockouts by offering immediate tracking of sales and inventory for each item. Adjustments aren’t necessary b those apart from losses such as theft or damage. While they can’t entirely bypass the need for periodic physical inventories, they seamlessly integrate inventory updates through barcode scanners and other computerized records.
By joining forces with finance and accounting departments, perpetual inventory data enhances customer service with up-to-date product availability, replacement parts, and more.
Perpetual vs. Periodic Inventory Systems
Despite differences in their functionality, the contrast between perpetual and periodic inventory systems revolves mainly around their tracking methodology:
- Perpetual Systems: Utilize constant digital tracking to maintain an up-to-date record.
- Periodic Systems: Depend on scheduled physical counts for updates.
Large businesses benefit more from perpetual systems due to their lower error margins and continuous updates, which improve the overall efficiency of cost of goods sold (COGS) calculations.
| Perpetual Inventory Systems | Periodic Inventory Systems |
|---|---|
| Instant updates | Physical counts required |
| POS Systems integrated | Date-based record updates |
| Ideal for large enterprises | Suited for smaller firms |
| Lower error margin | Higher error margin |
Pros and Cons of Perpetual Inventory Systems
Pros:
- Real-Time Updates: Continuous tracking provides immediate data.
- Informed Forecasting: Insights into buying patterns for better stock planning.
- Streamlined Location Management: Simplifies multi-branch inventory control.
- Efficient Financial Reporting: Helps in the seamless preparation of financial statements.
- Downtime Reduction: Decreases the need for frequent store closures for inventory counts.
Cons:
- Loss of Stock: Issues like damage or theft can disrupt inventory accuracy.
- Potential Tracking Errors: Human or technical faults can cause data inconsistencies.
- Cybersecurity Risks: Requires strong protection against hacking.
- Higher Initial Costs: Investments in technology and training can be significant.
- Physical Inventory Necessary: Sporadic manual counts still play a role.
| Pros | Cons |
|---|---|
| Real-Time Updates | Stock loss |
| Forecasting Accuracy | Potential tracking errors |
| Site-wide Management | Cybersecurity risks |
| Easier Financial Prep | High Initial Investment |
| Less Downtime | Necessity of Physical Checks |
Deciding When to Deploy a Perpetual Inventory System
For large companies dealing with expansive inventories and multiple locations, the switch to perpetual inventory systems is a compelling choice. Additional considerations include:
- The budget for implementation and maintenance.
- Inventory volume and complexity.
- Vendor responsiveness to inventory management adaptations.
Steps to Implement a Perpetual Inventory System
Setting up requires companies to log every inventory item initially and update for each sale via POS terminals and barcode scanners. While still necessitating occasional physical inventories, perpetual systems utilize techniques like cycle counting to ensure continuous accuracy.
Inventory Management Techniques
Four key management methods integrate effectively with perpetual systems:
- Just-in-Time (JIT) Management: Tracks inventory for timely delivery based on demand.
- Material Requirements Planning (MRP): Schedules production and ordering based on material needs.
- Economic Order Quantity (EOQ): Determines order quantity pushing inventory cost successors.
- Days Sales of Inventory (DSI): Measures average inventory turn-around.
Cost of Goods Sold (COGS) Insights
In perpetual systems, the COGS metric is always current, involving continuous updates following transactional activities, contrasting with the periodic system where COGS only assesses post-inventory checks using the formula:
COGS = BI + P - EI
Examples of Inventory Costing Systems
Businesses can leverage alternate costing systems like FIFO, LIFO, or weighted average - each providing different temporal cost recognitions while ensuring accurate financial depictions aligned to changing inventory scenarios.
Summary
Perpetual inventory systems, whilst sizable investments, empower large enterprises with accurate, real-time inventory tracking and operational efficiency. They seamlessly mesh into dynamic, expansive applications, significantly trimming labor dependencies and bolstering analytical oversight in variable sales landscapes.
Related Terms: inventory management, FIFO, LIFO, EOQ, COGS, point-of-sale, cycle counting
References
- Small Business—Chron.com. “Difference Between Perpetual & Periodic Inventory System”.
- Oracle NetSuite. “The Definitive Guide to Perpetual Inventory: What Is a Perpetual Inventory System?”
- FreshBooks. “What Is a Perpetual Inventory System?”
- eFinanceManagement. “Advantages and Disadvantages of Perpetual Inventory System”.
- BusinessTech. “Advantages and Disadvantages of Perpetual Inventory System”.
- Oracle NetSuite. “Inventory Cycle Counting 101: Best Practices & Benefits”.
- ShipHero. “Should You Use a Perpetual Inventory System?”
