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A perpetual inventory system is a method of tracking inventory levels in real time, so businesses can have a constant and up-to-date view of their inventory levels.
Unlike periodic inventory systems, where inventory levels are only updated at set intervals, a perpetual system updates inventory levels with every sale or purchase.
Each inventory system is valid and which you use depends on the needs of your business.
In this complete guide, we’ll review…
But first, let’s unpack our definition in a little more detail.
As we noted above, a perpetual inventory system tracks inventory in real time.
In a perpetual system, businesses use technology such as barcode scanning, RFID, or automated inventory management software to track inventory levels.
They can use these tools to accurately determine when they need to reorder products, which helps prevent stockouts or overstocking. Ultimately, making informed decisions about purchasing and production results in improved cash flow and increased profitability.
Perpetual inventory systems are a bit like Google Maps on your smartphone. Just as Google Maps constantly updates your location and provides current information about traffic and detours, a perpetual inventory system provides real-time information about your inventory levels.
Every time an item is sold, the system updates your inventory levels so you always know exactly how much stock you have on hand.
In contrast, periodic inventory systems are like printing out MapQuest directions (our Gen Z readers may be a bit too young for that reference).
You might use printed directions to plan your route and determine your location at set intervals, but you don't have real-time information about traffic or detours.
Similarly, in a periodic inventory system, you might take stock of your inventory levels at set intervals, but you don’t have current information about your inventory levels or know exactly when you need to reorder products.
Businesses developed the perpetual inventory system because of the limitations of periodic inventory systems, which were often inaccurate and caused stockouts and overstocking.
Plus, new technology like barcode scanners made it easy to update inventory levels instantly.
Today, a wide range of businesses use perpetual inventory systems, including retailers, manufacturers, wholesalers and distributors.
These systems are particularly useful for businesses with high-volume and fast-moving inventory, as they help to ensure inventory levels are always accurate and up-to-date.
In recent years, the use of perpetual inventory systems has grown as businesses seek to improve their operations and stay ahead of the competition.
And with the rise of ecommerce, real-time inventory management is more important than ever, and the perpetual inventory system has become the standard for inventory management across all verticals and industries.
Perpetual inventory systems are helpful for preventing some of the most common issues in warehouses and product-based businesses, but they aren't without some challenges.
Let’s compare the advantages and disadvantages of perpetual inventory systems and periodic inventory systems, so you can make an informed decision on which approach is best for your business.
In the world of business, more intelligence about the health or status of your operations is always a good thing. That's what a perpetual system offers - constant, real-time intelligence.
There are several other advantages to using a perpetual inventory system, including:
A perpetual inventory system updates inventory levels in real time, giving businesses an up-to-date view of their inventory.
By updating inventory levels with every sale, a perpetual inventory system provides a more accurate picture of inventory levels than periodic inventory systems, which are often subject to human error.
With real-time information about inventory levels, businesses can avoid stockouts and overstocking, which can negatively impact customer satisfaction and result in lost sales.
A perpetual inventory system can help businesses streamline their operations, reduce waste and increase efficiency – improving profitability.
A perpetual inventory system provides a wealth of data about inventory levels, sales patterns and customer behavior, which can be used to make informed decisions about purchasing and production.
With this constant stream of information, businesses can also make informed decisions about their supply chain, which can improve supplier relationships and reduce lead times.
By avoiding stockouts and ensuring accurate inventory levels, a perpetual inventory system can help businesses improve customer satisfaction and increase loyalty.
Overall, a perpetual inventory system can be a valuable tool for businesses looking to improve their operations, increase efficiency and stay ahead of the competition.
It's hard to say the following are "disadvantages" of perpetual systems because most of what we're about to discuss is part and parcel of best practices.
It's more precise to call these "challenges," and in our opinion, they're challenges worth taking on if you want your business to grow and have true mastery over your inventory management.
Implementing a perpetual inventory system can be expensive, particularly for small businesses.
The costs associated with purchasing and implementing the required technology, like barcode scanning equipment or inventory management software, can be significant.
If it’s not set up properly, a perpetual inventory system can be subject to technical difficulties, such as software glitches or hardware malfunctions. This can result in inaccurate inventory levels – an obvious problem for a business.
This is why it's so essential to ensure whatever inventory management software system you use has a strong reputation for customer service.
Employees will need training to use the new technology and processes associated with a perpetual inventory system, which can be time consuming and expensive.
That said, growth always requires change and change always requires training. Plus, continuing education in professional settings is never a bad thing.
A perpetual inventory system generates a lot of data, which must be properly managed and analyzed in order to be useful. This can be a challenge for businesses that lack the necessary resources, tools or expertise.
A perpetual inventory system depends on technology, which can be a disadvantage for businesses that lack the necessary infrastructure or are located in areas with limited or spotty internet access.
A perpetual inventory system can be more complex than a periodic inventory system, which certainly comes with a learning curve. This, in our opinion, is a worthy price to pay for the efficiency gains you'll experience using a perpetual system.
While perpetual inventory systems may be the standard, there remain some key benefits to using a periodic inventory system:
Implementing a periodic inventory system is typically less expensive than a perpetual inventory system, as it requires fewer resources and less technology. This can be especially beneficial for small businesses just starting out or those with limited budgets.
By definition, a periodic inventory system requires fewer moving parts to function and is often simpler to implement and use than a perpetual inventory system. However, easier doesn't always mean better.
A periodic inventory system does not require the use of technology, such as barcode scanning equipment or inventory management software. This can be an advantage for businesses that lack access to technology or have limited technical expertise.
Using a periodic inventory system, especially in fast-paced, modern ecommerce settings, has several potential disadvantages:
With a periodic inventory system, inventory levels are only updated at set intervals. This can cause discrepancies between the inventory database and the actual inventory levels.
Increased risk of stockouts
Because inventory levels are only updated at set intervals, businesses using a periodic system are more likely to experience stockouts than those using a perpetual system. This can decrease sales and customer satisfaction.
In a periodic inventory system, businesses may purchase more inventory than they actually need, leading to overstocking and increased inventory cost.
Conducting a physical inventory count is a time-consuming process that can be disruptive to a business's operations. In a periodic inventory system, this process must be conducted at set intervals, adding to the time and resources required to manage inventory.
With a periodic inventory system, businesses have limited visibility into their inventory quantities, making it difficult to make informed decisions about purchasing and production.
Overall, a periodic system may have some advantages and be a good fit for a small business, but it also carries the risk of increased costs, inefficiency, and customer complaints.
With a perpetual inventory system, businesses can avoid these issues and maintain a more accurate record of their inventory levels.
At Linnworks, our whole mission revolves around delivering real-time insights into business operations through comprehensive inventory management software.
Naturally, we're going to recommend the perpetual system for managing inventory data.
But once again, in the spirit of fairness, let's take an honest look at some scenarios in which a periodic inventory system may be right for your business
Periodic inventory management may be more appropriate for businesses with a small number of items or a low turnover rate.
As mentioned earlier, a periodic system will be simpler and less expensive to implement.
Examples of businesses that may benefit from periodic inventory management include:
In these types of businesses, the cost and complexity of implementing a perpetual inventory management system may outweigh the benefits.
A periodic inventory management system can provide a sufficient level of accuracy and efficiency and can help to keep inventory records manageable.
Most businesses that use a perpetual inventory method do so via inventory management software.
Here are some of the "ingredients" that make a perpetual system work:
Barcode scanning or RFID technology: Every time a product is sold or received, it is scanned using barcode scanning or RFID technology. This information is then sent to the inventory management system.
Inventory management system: The inventory management system receives the information from the barcode scanning or RFID technology and updates the inventory database in real time.
Inventory database: The inventory database is constantly updated with information about sales and purchases, maintaining an accurate and up-to-date inventory record.
Receiving process: When products are received, they are scanned and the information is transmitted to the inventory management system, which updates the inventory database, the COGS account and the inventory value instantly.
Journal entries: The perpetual inventory system automatically generates journal entries to reflect changes in inventory levels, such as sales or purchases. These journal entries update the COGS account and the inventory value in real time.
COGS account: The COGS (cost of goods sold) account is updated with information from the journal entries, providing an accurate view of costs and profits.
Reordering triggers: Based on the information in the inventory database, the inventory management system can set reordering triggers that alert businesses when it's time to reorder products.
Reordering process: When a reordering trigger activates, the inventory management system generates a purchase order, which is sent to the supplier. This process can be automated, reducing the risk of human error and increasing efficiency.
Continuous cycle: This process is repeated continuously, so businesses can have an accurate, up-to-date understanding of their inventory levels, costs and profits at all times.
Perpetual inventory systems can streamline inventory accounting by providing real-time information on stock levels. This information is used to calculate the cost of goods sold (COGS) and to update inventory records on a continuous basis.
In contrast, periodic inventory systems rely on physical inventory counts at set intervals (weekly, monthly, quarterly) to determine COGS and update inventory records, which can result in inaccuracies and inefficiencies in the inventory accounting process.
In a perpetual inventory system, COGS is calculated as items are sold, rather than at the end of an accounting period. This allows businesses to have a more accurate and up-to-date view of their COGS because they are constantly updating their inventory records based on sales and purchases.
This can help businesses make better decisions about when to reorder stock, how much to order and how to manage their inventory levels.
Not to mention the fact that many inventory management software platforms automatically integrate with your existing accounting system, thus streamlining (or completely automating) your accounting records.
By continuously updating inventory records, businesses can avoid the time-consuming task of performing physical inventory counts and can avoid the inaccuracies that can result from estimating COGS for the period between physical counts.
In addition to affecting COGS, your inventory system may also impact other inventory account metrics. Here's how:
Beginning inventory: In a perpetual inventory system, beginning inventory is determined by taking a physical count of the inventory at the start of the accounting period. This physical count is then compared to the information in the inventory database to ensure accuracy.
Ending inventory: In a perpetual inventory system, ending inventory is updated in real-time with information from sales and purchases. Every time a product is sold, the inventory management system updates the ending inventory, providing an accurate and up-to-date picture of inventory levels.
Purchase account: The purchase account is updated in real time with information from the journal entries generated by the perpetual inventory system. This information reflects the cost of the products purchased during the purchase accounting period.
Purchase accounting period: In a perpetual inventory system, the purchase accounting period is continuous, as the inventory management system updates the purchase account in real time with information from sales and purchases.
Partner with a vendor: Work with a vendor that specializes in perpetual inventory systems to ensure the system is properly implemented and integrated into your operations.
For more information on how Linnworks can help you with this, we'd love to show you a live demo of the software, or you can check out an overview of our platform.
Conduct a thorough needs assessment: Before implementing a perpetual inventory system, conduct a thorough needs assessment to ensure that the system meets your specific needs and goals.
Invest in the right technology: Invest in the right technology, such as barcode scanning equipment or RFID technology, to ensure that you have all the tools you need to hit the ground running as soon as you implement a perpetual inventory system.
Train employees: Provide training to employees on perpetual inventory methods and how to use the new technology and processes associated with the system.
Establish clear processes: Establish clear processes for updating the inventory database, generating journal entries and reordering products to ensure that the perpetual inventory system is effective and efficient.
Monitor and analyze data: Use the data generated by the perpetual inventory system to monitor and analyze your inventory levels, sales patterns and customer behavior. This information can be used to make informed decisions about purchasing and production.
Continuously evaluate and improve: Continuously evaluate and improve the perpetual inventory system to ensure that it continues to meet your needs and goals over time.
Linnworks is a leading ecommerce inventory management solution that can help businesses of all sizes implement a perpetual inventory system effectively and efficiently.
With Linnworks, you'll get:
A user-friendly interface: Linnworks has a user-friendly interface that makes it easy for businesses to manage their inventory levels, sales and purchases. We designed the system to be intuitive and accessible, enabling businesses to get up and running quickly.
Integrations with leading ecommerce platforms: Linnworks integrates with leading ecommerce platforms, such as Amazon, eBay and Shopify, so businesses can manage their inventory levels across multiple channels from a single platform.
Automated processes: Linnworks automates many of the processes associated with a perpetual inventory system, such as reordering and updating inventory levels. This reduces the risk of human error and increases efficiency.
Real-time data: Linnworks provides real-time data about inventory levels, sales patterns and customer behavior, helping businesses make informed decisions about purchasing and production.
A scalable solution: Linnworks is a scalable solution that can grow with your business, making it an ideal choice for businesses looking to expand.
Expert support: Linnworks provides expert support to help businesses get the most out of the system, ensuring they implement and use the perpetual inventory system effectively and efficiently.
With Linnworks, businesses can streamline their ecommerce operations, reduce waste and increase efficiency.
Speak to us to find out how Linnworks can connect and automate your commerce operations so you can capture every revenue opportunity.