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Are you a business owner struggling to maintain the correct data of your inventory? Have you ever faced situations like unexpected stockouts or overstocking of goods? Have you figured out why these happen? This happens because of not having a proper inventory management system. Managing inventory can make or destroy a business, so selecting the appropriate technology is critical. Inventory management is the foundation of any successful business, ensuring that stock levels are optimal to fulfill consumer demand while minimizing financial hardship. The landscape is dominated by two basic inventory systems: perpetual and periodic. Let’s discuss these two in detail in this blog.

Understanding the Perpetual Inventory System

A system that continuously updates inventory levels in real-time as transactions like sales and purchases take place is known as perpetual inventory management. This system gives organizations real-time stock visibility by automatically recording inventory changes using technology such as point-of-sale (POS) systems and software. In perpetual inventory management, each sale is updated instantly to the inventory count without any delay. Not just sales, all purchases and stock returns are also updated immediately. During sales and restocking, items are scanned using barcodes or RFID tags to ensure accurate and timely data entry. Moreover, the Cost of Goods Sold (COGS) and total inventory valuation are automatically adjusted by the system.

Some of the major advantages of perpetual inventory system includes its real-time visibility, reduced stockouts, improved accuracy, simplified inventory management and so on. Looking into the negatives of this inventory system it seems to require a higher initial setup cost, as you need to install the hardware and software and other components. Other than that regular maintenance is necessary and it comes with a certain software fee. You might also need to invest time and money to train your staff, and periodic physical audits are recommended to ensure the data is accurate.

Understanding the Periodic Inventory System

A periodic inventory system is a type of inventory management in which a company physically counts its inventory at predetermined intervals (such as monthly, quarterly, or annually) to determine the quantity of goods on hand. At the end of the period, the company estimates the cost of goods sold (COGS) based on that count rather than updating inventory records after each sale.

The key aspect of this approach is that inventory levels are determined using a physical count at regular intervals rather than continually throughout the period. For calculating COGS using the periodic inventory method, add the initial inventory to the purchases made during the period and remove the final inventory from the total. This strategy is frequently used by small firms since it is simpler to administer and needs less record-keeping than a permanent inventory system. The formula for calculating COGS under periodic inventory is COGS = Beginning Inventory + Purchases – Ending Inventory.

Some of the key advantages of periodic inventory management are it is simple and cheap to implement, lower initial cost setup, flexibility in scheduling inventory counts and the ease of record keeping through manual or using a spreadsheet. Moreover, it’s more ideal for smaller businesses as it is simpler to understand. Looking into the negative sides there might be human errors as it is manually entered or recorded. Also, there will not be a real time visibility of the stocks which might lead to stockouts or even overstock. Disruptions during physical inventory counts are possible, and the business may need to close temporarily.

Perpetual Inventory Management vs Periodic Inventory Management

Basis for Comparison 

 

Perpetual Inventory System 

Periodic Inventory System 
Frequency of updating  

 

 Real-time & continuous 

 

 Scheduled intervals 

 
Accuracy  Highly accurate   More chance to have errors due to manual data entry. 
Possibility of Inventory Control 

 

 High as real-time data ensures better control  Low as errors and theft might go unnoticed until counting. 
Effect on Business Operation 

 

 Minimal disruption, automated processes. 

 

 Potential interruptions during stocktaking activities. 
Cost of Implementation  Comparatively high due to integration of technology   Low cost of implementation  
Suitable For  Larger businesses that have frequent sales and purchases  Smaller businesses with low volume of transactions  

Which Inventory Management System is Right for Your Business? 

When deciding which inventory system to choose for your business you need to consider several factors. It includes the size of your business and its complexity, inventory volume, turnover, budget, and so on.  

 Perpetual inventory system is suitable for: 

  • Companies that transfer their products frequently and have strong sales volumes.  
  • Businesses make decisions based on real-time data.  
  • Organizations that need precise reporting for cost accounting. 

 Whereas periodic inventory system can be helpful for  

  • Small firms have minimal resources.  
  • Businesses that have modest volumes of transactions.  
  • Companies that are searching for a more straightforward, affordable solution. 

Some firms even use a hybrid approach, using perpetual systems for crucial goods while periodically counting less significant things. 

Conclusion 

Through this blog you may have understood that both perpetual and periodic inventory management systems have their own positives and negatives. One suits businesses with large turnovers and frequent sales, whereas the other one is best suited for small businesses. The best system for your business depends on your requirements. Thus, when selecting an inventory management system for your business, first assess its needs and choose the type that suits it wisely. As effective inventory management is one step closer to your business success by properly managing your inventories, having such a system is always a great option. You can connect with the best inventory management system providers like Smacc to assist you in identifying what is best for you.