You’ve seen a sudden uptick in sales of a particular product of yours. So much so that you’ve decided to order an entire shipment.
If you’d been practicing proper inventory management, you would know that you didn’t have to waste money on more product and make your customers wait for their goods. You have an entire crate in the back.
Perpetual vs. periodic inventory system, which option is better suited to ensure this issue doesn’t happen again? That all depends on the size of your store and how many products you sell each week. Check out this guide to learn more.
What Is Perpetual Inventory?
When it comes to perpetual inventory, details are everything. It uses a business’s point-of-sale system, asset management technology, and inventory tracking software to keep count of every sale that a company makes.
Whenever a customer comes into your store and buys something, the system will update itself automatically to account for the transaction.
Due to how thorough the perpetual inventory system is, you’ll only have to perform one or two inventory counts during the year.
Since the system updates itself so often, you’ll know when you’re about to run out of a product. It will also let you know if you have any inventory shrinkages.
If you don’t have a lot of inventory, having a perpetual inventory system is a little overkill.
You’ll need to have powerful accounting software to make the most out of the system, which can be expensive. It also requires constant recordkeeping. If you’re a smaller startup, you might be better off saving your time, money, and energy.
What Is Periodic Inventory?
If you don’t have a lot of inventory to contend with, a periodic inventory count will be more than enough for you. It involves the physical count of your inventory at certain intervals.
You’ll take inventory at the beginning of a period, add your purchases, and deduct your ending product to get your final count.
The main benefit of periodic inventory is the fact that it allows for easy recordkeeping for smaller businesses.
It doesn’t require accounting software to function, making it a cheaper option for startup companies. It’s not too difficult to implement on a store level, either.
Since you won’t know what your inventory is looking like until after your counts are over, it will be a little difficult for you to keep track of and account for shrinkage.
Even if you have a small store, physically taking inventory can be time-consuming. It could disrupt normal store operations as well. If you have defective inventory on your shelves, you’re not likely to notice it until after your counts.
Periodic inventory is prone to human error. Since it’s physical, it can be easy to lose. If that were to happen, you would have to start your counts over again from the top.
Perpetual Vs. Periodic Inventory: Key Differences
The main difference between these two systems is the companies that use them. Again, large corporations can make better use of perpetual systems. Startups are more likely to use the periodic method.
That’s only one way that perpetual systems differ from periodic ones, however.
Margin of Error
Since periodic inventory is done manually, it’s more vulnerable to human error. If you miscount or forget to account for a box, it won’t show up in your system.
If that happens, you may end up ordering a shipment that you don’t need. The miscount could cause a customer to wait to receive a product that you had sitting in your back room the entire time.
Perpetual systems are updated every second via computer. While technology does have the tendency to act up from time to time, it’s safer to bet on it rather than physical counts in some cases.
When it comes to perpetual inventory, you don’t have to record your data at all. The computer does it for you. As soon as a transaction goes through, you’ll be able to see it reflected in the system.
If you’re using the periodic inventory method, you’ll have to sit in your backroom with a clipboard. It takes a while and can be a bit tedious.
If you don’t have a lot of inventory, it only takes a few hours, but if you’re a larger corporation, it’s impossible.
Ease of Use
Ease of use is all a matter of opinion. If you only sell a handful of products, doing a physical count is no more annoying than sweeping the floor. The only time you’ll find yourself becoming frustrated is when you have to do recounts.
If you own a huge chain place, doing your counts manually will take all day and make you want to rip your hair out.
You would be better off allowing a computer to keep track. You’ll also never have to worry about going behind someone else to do recounts.
You’ll still have to take inventory to make sure the computer is doing its job, but only once or twice a year.
Choosing the Right Inventory System for Your Company
If you let your inventory get out of hand, it could cost you a lot of time and money. You also risk your reputation.
When it comes to accounting for all your product, you have a choice. Perpetual vs. periodic inventory, which is the best option for your company? That all depends on if you’re a corporation or a startup.
Corporations have better luck with perpetual systems, and startups tend to benefit more from periodic ones.
For more inventory management tips and tricks, visit the Business & Finance section of our blog.