Before you opened your store, the idea of inventory management likely sounded like one of the easiest tasks you’d have on your to-do list. After all, inventory management is just the small matter of counting stock, right?
Fast forward to today, and you probably know that inventory management encompasses many other processes such as inventory control, inventory costing, and calculating carrying costs, and — depending on your business — some processes won’t apply to you at all.
Selecting the right type of inventory management for your business is crucial to your bottom line. In this guide, we explore the perpetual inventory system to help you decide if it’s the right fit for your business.
Overview: What is a perpetual inventory system?
The perpetual inventory method tracks inventory on a continual basis, as opposed to the periodic system, which tracks inventory at the end of a prescribed accounting period (usually a weekly, monthly, quarterly, or annual basis).
Inventory levels are updated automatically, tracking items that have been purchased, inventory that has been received, and stock that has been returned. For this reason, the perpetual method of inventory can only be carried out using inventory management software and/or a point-of-sale system.
The perpetual inventory system is usually employed by businesses that have larger numbers of inventory units and simply don’t have the time to manually count items of inventory. Grocery stores, for example, typically use the perpetual inventory accounting method.
This method would not be necessary for a field service business that sells very few items of inventory on a monthly basis while making the bulk of its income from services.
Advantages of using a perpetual inventory system
Each inventory management system has its benefits, but let’s explore how the perpetual inventory system can benefit your business.
Lowers the cost of inventory management processes
Time is money, and anyone who’s spent any amount of time counting inventory and tracking the various processes involved will attest to the fact that inventory management is a heavily time-consuming task.
Since the perpetual inventory management system automatically updates inventory levels when products are sold, returned, and discounted, there’s very little need for manual intervention, freeing up retailers’ time.
Records accurate accounting information
While periodic inventory management systems only calculate the cost of goods sold (COGS) when you conduct a physical count of the entire inventory, perpetual systems automatically update the inventory ledger every time you make a sale. This means that your books will be much more accurate and represent a more precise and up-to-date account of inventory.
Demand forecasting becomes data-driven
Since the perpetual inventory system provides a much more accurate view of your products’ current and past performance, you’ll be much better equipped when it comes to making forecasting and purchasing decisions.
Availability of real-time data
Data is a retailer’s best friend, and perpetual inventory systems offer up reams of insightful business data. Since every transaction related to inventory is recorded in this system — every sale, every return, every promotional discount — retailers are able to make more mindful decisions when it comes to selecting stock and suppliers, and even merchandising decisions.
For example, you’ll quickly be able to identify if your cross-merchandising strategies are working if grouped products are selling well together. Additionally, you’ll be able to pinpoint products that are being returned more than others.
Disadvantages of using a perpetual inventory system
No inventory management system is perfect. Here are few areas where the perpetual inventory method can fall short.
Expensive setup costs
Investing in a solid inventory management tool is not technically a disadvantage, but it does mean that choosing this system requires more upfront costs than other methods. Barcode scanners are also a necessary purchase for those wanting to use this method, which adds to the initial cost of investment.
Additionally, you’ll need to invest time and money in employee training on any new software and devices.
Broken, spoiled, and stolen items aren’t automatically accounted for
The perpetual inventory method records all products that are sold, returned, and discounted. However, when actions outside of the inventory management tool occur — such as items that are broken, spoiled, or stolen — they won’t be recorded unless someone physically notices these actions, or until a physical inventory count is conducted.
Can be subject to human errors
No inventory management system is error-free, and just because the perpetual inventory system is an automated one, that doesn’t mean that it's an infallible, error-free method.
Employees can easily make mistakes when it comes to inputting inventory quantities, scanning items at the checkout, and when handling returns.
Is a perpetual inventory system right for you?
There are four main types of inventory management system: the perpetual system, the periodic system, the barcode system, and the radio frequency identification (RFID) system. Selecting a system will depend on a variety of factors, but if you recognize the following aspects in your own business, the perpetual method might be the right fit.
You have a large quantity of inventory
Large quantities can not — and should not — be counted by hand. This method is far too time-consuming and inaccuracies will occur more often than not.
Typically, retailers with low-volume, high-ticket sales, such as jewelers, don’t use the perpetual system as it’s very straightforward to count their inventory. Meanwhile, grocery stores are common users of the perpetual inventory system.
Your goods are sold quickly
Some retail settings are home to very quick sales and opt to use perpetual inventory methods to reduce the amount of time spent on inventory. Grocery stores sell huge quantities of inventory in a very short period of time, which makes an automated system the best option for them to use.
You need an accurate demand-forecasting system
Many retailers don’t need to use demand forecasting as much as others. Car garages, for example, might not opt to use a system that incorporates robust demand-forecasting features because they simply don’t need to. Other retailers, such as those who sell similar stock all year round, can pinpoint when certain items are most popular and optimize their purchasing behavior.
Is the perpetual inventory system right for your business?
The perpetual inventory system is a good choice for larger businesses selling large quantities of inventory on a daily basis. Though using this method does involve significant startup costs, it's a worthy investment in the health and future of your business.
If you’re still unsure on which inventory management system to adopt, you can read more about inventory management system types in my guide, 4 Types of Inventory Management Systems for Small Businesses.