A perpetual inventory system is an accounting and inventory management method that continuously tracks and records inventory changes (with every transaction). It does this using supply chain management software and digital input devices such as point-of-sale (PoS) systems and barcode/RFID scanners. Along with the periodic inventory system, it is one of the two most employed and accepted methods to account for inventory Show
Compare Top Inventory Management Software Leaders The idea behind the perpetual inventory method is to turn stock-keeping into a constant, digitized, real-time activity instead of a periodic and manual one. It involves a lot more data processing, but the advantages of perpetual inventory outweigh that hassle – especially with modern digital technology. What This Article Covers
How Does It Work?At its simplest, a perpetual inventory system involves tracking, recording and updating all changes made to your inventory as-and-when they happen, for goods received, used for production or sold (at the PoS). Here’s an example of how it could proceed:
The example above is just one way to set the system up. Depending on the structure of your organization’s supply chain management system, existing ERP systems and the different procedural infrastructures, perpetual inventory systems can be configured to fit exact requirements. Get our Inventory Management Software Requirements Template Perpetual vs. PeriodicThe main difference between perpetual and periodic inventory systems is in the frequency of updating the inventory data (in the warehouse as well as central ledgers). Periodic inventory systems use set intervals (such as monthly or annually) or accounting periods to track inventory and update databases. Perpetual systems use a continuous process to monitor transactions and update inventory databases automatically, in real-time. This fundamental difference affects inventory and warehouse management at multiple levels:
Setting up a software-driven perpetual inventory system. Source Moreover, periodic inventory systems typically require employees to stop warehouse activity and take a physical inventory count. They then compare this with the data in the sales and general ledgers. The process also involves regular inventory audits and other time-consuming manual activities. Perpetual inventory can eliminate all the time and effort expended in such activities through automation and continuous collection and updating of inventory data. Compare Top Inventory Management Software Leaders Pros and ConsLike all business management systems, the perpetual inventory system isn’t all benefits and advantages. Depending on the organization’s products, infrastructure, scale and capabilities, there are good reasons to choose (or not choose) perpetual inventory. Let’s explore some of these considerations: ProsPerpetual inventory is the preferred method of inventory management, especially for organizations with high-volume inventories, and for good reason! Here are the more important ones:
ConsWhen it comes to inventory management, there is no one-size-fits-all solution, and the perpetual inventory method is no exception. Here are some reasons you may not want to choose it:
Get our Inventory Management Software Requirements Template Who Uses the Perpetual Inventory System?Do you deal with large inventory quantities and are looking to scale your business? Doesn’t matter what your industry size is because investing in a perpetual inventory system is just what you need. If you are running a large business, keeping track of inventory can be tedious. Unless you have a regularly updated database of products to automate, control and track inventory. With perpetual inventory, you can access real-time information without hopping around between your multiple warehouses. Perpetual inventory is also a big hit when it comes to dropshipping since here inventory is always on the move and keeping a constant count is necessary. The supplier-reliant model of dropshipping coordinates order data and helps prevent stockouts. Which Should You Choose?As you’ve probably guessed from the section above, there are cases both for and against perpetual inventory, and their validity depends on certain parameters of your business: Inventory and Transaction VolumeYour inventory’s size significantly affects which of these two methods suits you. For most businesses with a high inventory volume, the perpetual inventory method’s benefits are overwhelming. This is simply due to the time and effort required to perform physical counts of their inventory. Add a high transaction volume to that, and the effect compounds! A large number of transactions automatically allows the perpetual method to create extensive databases that benefit all business operations. Periodic inventory systems can only be viable for businesses with low inventory volume. While that doesn’t necessarily mean that your transaction volume is also low — but the chances are high! Businesses such as car dealerships or jewelry stores (with low transaction and inventory volume but very high-value products) typically have an easier time with the periodic method, especially to ensure zero discrepancies. Location DiversityIf your business has multiple locations with frequent inventory transfers, inventory management becomes much more complicated. In such cases, the perpetual system is the better choice by far. It automatically creates a centralized inventory database across locations, cutting down the chances for error. Periodic systems would involve handling multiple databases and the need to expend extra effort in ensuring that the data concurs. The costs incurred (both time and money) for such a business to maintain periodic inventory counts are much higher, making it an impractical choice. Perpetual inventory system generating multi-location transaction history. Source BudgetThe most obvious consideration is probably your budget — whether you can reasonably invest in a perpetual system’s initial setup cost. The infrastructure required to implement this method accurately is significant, bringing with it a financial burden that small businesses may not be able to shoulder. Compare Top Inventory Management Software Leaders Final ThoughtsThe perpetual inventory system is the preferred accounting method for industry leaders globally, but it requires an adequate technological framework to implement within. It is undoubtedly the better accounting and inventory management method if your organization can streamline the software selection process, handle the initial costs and maintain the system without errors. That said, it always pays to be careful, and it is highly advisable to periodically conduct physical inventory counts and make sure your data matches what the ledgers show. Which inventory method do you think suits your business best, and why? Let us know in the comments below! How does implementation of perpetual inventory system improve control over inventory?A perpetual inventory system works by updating inventory counts continuously as goods are bought and sold. This inventory accounting method provides a more accurate and efficient way to account for inventory than a periodic inventory system. Here is a step-by-step overview of how this type of inventory system works.
What is a perpetual inventory system and why is it important?Perpetual inventory is a continuous accounting practice that records inventory changes in real-time, without the need for physical inventory, so the book inventory accurately shows the real stock. Warehouses register perpetual inventory using input devices such as point of sale (POS) systems and scanners.
What are objectives of cost accounting state the advantages of perpetual inventory records?6 Main Advantages of Perpetual Inventory Control. Quick valuation of closing stock:. Lesser investment in materials:. Helpful in formulating proper purchase policies:. Immediate detection of theft and leakages etc:. Adequacy of working capital:. Beneficial in ascertaining efficiency of stores organisation:. Why is perpetual inventory procedure being used increasingly in business?In a perpetual inventory system, changes to inventory levels are recorded in real time, when inventory is purchased and when it is sold. This continuous stock taking provides you with the ability to run reports that can immediately identify inventory items that are running low.
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