What Is A Perpetual Inventory System? Why Should You Use It?
11 Mar 2021
The perpetual inventory system or a continuous inventory system is an accounting method that helps to track inventory volumes with real-time stock updates. The Perpetual Inventory Method dominates the retail industry due to the profound benefits that it offers to businesses. This method is the ultimate choice for any huge business owner dealing with high sales volumes.
There is another method also to track the sales volumes – the Periodic Inventory System. Some businesses count on the periodic one more than perpetual. There are many reasons why they choose this system over the perpetual.
Let’s now define each method separately and figure out which one will suit your business the best.
Perpetual Inventory System: The Definition
Perpetual Inventory System helps to record real-time stock updates. It gives information on the inventory status per each sales transaction. You can easily check how much inventory is left in your stock. It is not a big deal to know where is your inventory at the moment too with this method.
All these processes are applied with the help of an automated tracking system. Automation is one of the main benefits which this system offers. It helps to prevent stockouts.
Here is a perpetual inventory system example to understand the automation system better. Imagine a case when huge retail store owners sell products. They scan each product on sale. The data of each transaction goes to the main financial database of the store. This is the way the store owner gets updated information per each transaction.
Let’s now check the methods due to which the businesses work under a perpetual inventory system.
The Perpetual Inventory Method uses the Point of Sale (POS) systems. Point of Sale (POS) can be a physical place or a virtual sales point. Their purpose is to help the consumers to pay for the products or the services which they buy. A POS device can be a barcode scanner or card reader. They automate the whole sales transactions processes. The collected information about sales transactions goes to the main database of the businesses.
Updated Cost of Good Sold
Each time the businesses receive a new portion of products or sell them, they get updated information about the cost of goods sold (COGS). This system helps businesses to have an accurate picture of their business profitability throughout the year. This system helps to minimize labour costs too.
Preventing Inventory Shrinkage and Loss
Perpetual Inventory System helps businesses to prevent any cases of inventory shrinkage and loss. This method provides regular updates per each sales transaction. As far as you have ongoing accurate data about your sales, you can easily find the thefts and discrepancies.
What is a Periodic Inventory System?
The periodic Inventory System allows businesses to count the physical inventory within a certain accounting period. The accounting periods may vary for different companies. It could be monthly, quarterly or yearly.
Here is how the periodic inventory system works;
This method is the best option for small businesses with small sales volumes. It will cost huge money and investments for small businesses to obtain a perpetual method. It is the right choice for those who have high-profit margins but low sales volumes like art galleries or car dealerships. As the volumes of sales are not big, the business owners may count on manual calculations.
It is recommended to use a periodic management system if your sales volumes are not high. You can keep track of your stock manually. This system is the best choice if you have a limited number of products on sale for tracking as well.
The perpetual inventory method is the right choice for the rest. It provides a real-time stock update and accurate calculations. You can get the proper cost allocations with this method. It helps to automate all the work from the warehouses to the doorsteps of the end consumers.
Managing multichannel ecommerce sales is not an easy task. eSwap offers all the necessary tools to manage your inventory properly. Our software helps to automate all the sales control within several minutes. With the help of eSwap, you can focus on your business growth other than the management tasks.
In conclusion, we can assume that the periodic inventory method is less costly. Use this method if your business doesn’t rely on high financial accuracy. The perpetual system is the best solution for big enterprises with high sales volumes. If your business is dependant on high accuracy and regular updates, you should rely on this system.