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How Perpetual Inventory Works

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Last editedFeb 20212 min read

A perpetual inventory system tracks inventory in real time, centralising the data so that stock levels, sales trends and reorder points can all be monitored and automatically adjusted as sales are made. The perpetual inventory system is a much more advanced and accurate system for tracking and monitoring stock, although there are some circumstances where a traditional periodic inventory system can be of benefit. 

Here we look at the advantages and disadvantages of each system and see how your business can streamline invoice payments and sales records to better reflect the real-time situation.

Benefits of Perpetual Inventory

There are many advantages to using a perpetual inventory system for all kinds of ecommerce businesses, and genuinely no real disadvantages. Tracking inventory data in real time is of course the primary benefit, providing you with the utmost confidence in the accuracy of your inventory counts.

The perpetual inventory method also reduces labor costs and eliminates the human error factor thanks to automation. Time and energy spent on inventory management is decreased thanks to the real-time updates including data on inventory holding and restocking costs. By tracking all inventory movements and interactions throughout the supply chain, you can identify issues likes procedural bottlenecks and gain other useful insights.

Under a perpetual inventory system, forecasting demand is both simplified and more accurate than under a periodic system. Your historical inventory records and previous sales data can all be quickly applied to forecast future sales trends and cycles. This ensures your business maintains the optimal amount of inventory during the varying sales cycles throughout a year, including focused peaks and troughs such as seasonal holidays.

A perpetual inventory system will also instantly calculate your annual inventory balance at the end of the year. 

How Perpetual Inventory Systems Work

A standard perpetual inventory system example works as follows. When a product is sold, the point-of-sale system automatically notifies the perpetual inventory system, which instantly applies the debit to the main inventory, with the update occurring across all sales channels. Modern technology such as barcodes and RFID scanners (radio-frequency identification) makes this process very easy.

The cost of goods sold is then automatically recalculated and updated following the sale. This recalculation and update also occurs after new stock is received. 

The perpetual inventory system also uses historical data to automatically update reorder points regularly. Inventory levels can then be kept at the optimal level at all times as sales go up and down, with a new purchase order being generated whenever an item reaches its reorder point. Your supplier will also automatically receive the new purchase order.

Of course, fresh stock items still need to be physically scanned into the inventory when they arrive. Simple warehouse management software then records the new inventory and adds it to the main inventory management dashboard, now making it immediately available for purchase across all selected sales channels.

Benefits of Periodic Inventory Systems

The periodic inventory system relies on a physical count, or stock-take, of the goods to update the numbers. Usually this will occur after specified accounting periods such as a financial year. In some businesses using a periodic system can be favorable, but even so it is usually better to use it in tandem with a perpetual inventory method. 

One example where the periodic method is useful are for businesses that sell very high value items and thus likely keep a much lower level of stock, such as car dealerships and jewelry stores. A jewelry store’s use of the periodic system would primarily be an anti-theft measure, with frequent physical counts keeping a constant eye on the extremely valuable stock. Such businesses will usually employ an additional perpetual inventory system to maintain stock levels for the accounting system.

For any business operating with higher levels of stock, periodic systems can have more disadvantages than advantages due to the increased labor costs and human error factor, in turn causing a decrease in your confidence in the accuracy of your inventory counts.

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If you’re interested in finding out more about inventory management, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments to keep your business ahead of the competition.

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