Inventory Management: Periodic or Perpetual?

Inventory management is a complex and important set of strategies and processes necessary for the development of your business.

Directly or indirectly, inventory management affects everything - from warehouse record keeping to sales and accounting.

Historically, inventory management systems use two basic methods of overseeing stock - periodic, the older one, and perpetual, the newer one. Each business must know the pros and cons of each system to be able to choose the best option, for its size, expertise and ambition.

Periodic and perpetual inventory systems

In brief: Periodic inventory system

Both systems count and keep record of the stock quantity.

Periodic system, an original one, uses manual physical way of inventory record keeping to identify the ending inventory and the cost of goods sold. Ending inventory is measured at the end of the reporting period. The cost of goods sold (COGS) is a very important accounting and business performance indicator. Put roughly, COGS is a total of all costs spent on sold products (i.e. manufacturing, merchandise, materials and products supply, HR etc.). In more thorough terms, COGS is calculated using this formula:

Cost of goods sold formula

Beginning Inventory + Cost of Inventory Purchase - Ending Inventory = COGS

When a business uses a periodic inventory system it greatly depends on personnel which are supposed to update inventory levels regularly, counting the number of goods available and making warehouse audits. Then the workers combine sales levels and the cost of goods solved with the ending inventory, again manually. To keep data fresh inventory checks are usually held every month, which is tremendously time- and effort-consuming. On the other hand, rarer inventory checks are not too accurate. And it goes without saying, that there is always a time lag between updating inventory data and COGS accounting, which means that a real-time data is not available.

Periodic inventory management requires considerable investment into HR, and this investment is not always reasonable. To illustrate, just imagine how many workers you shall hire to count and keep record of stationery, or makeup products, for example.

Putting a word for periodic inventory system, one must admit that micro-businesses or retailers dealing with lower sales frequencies and/or larger-size goods - for example, exquisite luxury goods or expensive cars, can use a periodic system. Of course, provided that they accept the risk of not having the most accurate real-time data in their operational processes.

Pros and cons of a periodic inventory system:

Pros:

  • 1) Low implementation investment
  • 2) Fit for keeping track of low sales frequencies and larger-size goods

Cons:

  • 1) High investment into human power
  • 2) Real-time data is unavailable
  • 3) Time gap between counting and accounting operations
  • 4) Time- and effort-consuming manual inventory control

In brief: Perpetual inventory system

Large businesses, conglomerates and corporations, e-commerce giants, and companies enjoying high sales frequency undoubtedly need a perpetual inventory system.

Perpetual inventory system keeps record of inventory in a non-stop mode, and the movement of goods within a warehouse, shopping bag and cash desk is shown immediately and automatically. This magic allows keeping track of thousands of transactions for each inventory item in each location within a reporting period. Automated system also records all promotions, seasonal sales surges, periods of low sales - everything that affects inventory picking, relocation, discarding etc.

This system miraculously shows all inventory in real-time, that allows businesses to monitor and evaluate sales frequency, control the inventory, plan demand and avoid overstock and backorder issues.

Perpetual inventory system can reach its highest capacity and perform perfectly well if combined with cloud computer-based inventory control systems. Also, companies must install barcode systems or POS (point-of-sale) terminals and periodically double-check data manually.

Pros and cons of a perpetual inventory system:

Pros:

  • 1) Accuracy and timeliness of warehouse data
  • 2) Automated data gathering across various locations
  • 3) Possibility to track demand and sales predictions
  • 4) Ability to track thousands of inventory transactions
  • 5) Lower investment into personnel
  • 6) Ability to immediately detect theft, goods loss or damage
  • 7) Lower human interference, lower risk of human errors
  • 8) Synchronization with inventory control systems
  • 9) Less paperwork and smoother accounting processes

Cons:

  • 1) Spending money on personnel training and teaching
  • 2) Extra investment into POS terminals or barcodes
  • 3) Buying quite expensive computer and cloud software

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