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What is a perpetual inventory system?

Tracking inventory is key to understanding the sales and costs your business is facing. A perpetual inventory system is considered one of the best inventory management methods for tracking items, ensuring that you always have a clear overview of your current stock.

How does a perpetual inventory system work?

A perpetual inventory system varies from a periodic inventory system because it updates in real time for better overall inventory control. Unlike a traditional stock take that may occur at the end of every day/week, a perpetual system is, as the name implies, always running. That means if you have 20 items in stock at 9am, you don’t need to wait until 5pm to discover that 15 remain and you therefore sold five. Instead, your stock count will deplete by one as soon as an item is sold.

Perpetual inventory method vs. periodic method

There are several key differences between the two main systems of inventory, and it soon becomes clear why a perpetual system is more beneficial to particularly busy companies:

Perpetual inventory system

Periodic inventory system

Computerized inventory

Inventory must be manually counted

Instant

Time consuming

In in-built into business hours and beyond

Requires extra time at the end of the work day

Is outdated most of the time

Is always up to date

Overly complex for small businesses

Ideal for businesses with small orders

The perpetual inventory method is perfect for companies that fulfil a lot of orders every day, but it may be an overly complicated process for companies with a smaller number of orders. A perpetual system is automated using dedicated software, which means every item sold needs to be logged into a system when you start stocking them (this may involve processes like barcode generation and SKU codes). 

However, if you are a small business that works in smaller batches, for example, an artist selling limited prints or a car showroom which only makes a few sales a month, this extra admin and cost may not be worth it.

Should I use the perpetual inventory method?

While the number of orders you take is the best way to gauge whether the perpetual inventory system is ideal for you, there are other considerations as well.

For example, if your company deals with a lot of exchanges, returns, or discounts, even if your overall catalog is quite small, then an automated system can help you stay on top of the ins and outs of your stockroom. This is also true if you tend to release goods periodically, in which case a perpetual system can help you manage a rush of buyers if you anticipate your limited release of stock to be met with intense interest.

Other features of the perpetual inventory method

Generally speaking, companies with larger catalogs will benefit most from perpetual inventory. Not only does it save on employee labor, it also has other benefits that aren’t obvious at first, including:

  • Guarding against theft by removing the ‘blind’ window between each stock count

  • Minimizing error caused by manual counts

  • Improving forecast by always having accurate stock numbers

  • Accurate reporting of Costs of Goods (COGS)

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