Inventory management is a crucial aspect of running a successful business, especially if you deal with physical goods. However, there are different methods of tracking and recording your inventory, and each one has its advantages and disadvantages. In this article, we will compare and contrast two common inventory systems: periodic and perpetual.
A periodic inventory system is a method of accounting for your inventory that only updates the inventory balance at the end of a specific period, such as a month, a quarter, or a year. This means that you do not record every purchase or sale of inventory in real time, but rather use physical counts or estimates to determine the inventory value at the end of the period. Although this system is simpler and cheaper to implement than other methods, it does not provide accurate and timely information on inventory levels or allow for easy identification of errors, discrepancies, or obsolescence. Furthermore, it does not facilitate analysis such as inventory turnover, gross margin, or cost of goods sold, which are essential for optimizing your inventory management strategies.
I don't think this is very practical. In a system like this you would need to have countless items in inventory to ensure you don't run out if every sale isn't recorded when it happens. Doing a physical count at the end of the month would be impossible. Maybe if a place sell maybe 5 different goods only it could happen.
A perpetual inventory system is a method of accounting for inventory that updates the balance every time there is a purchase or sale. This requires investment in technology and training, but can provide accurate and timely information on inventory levels, allowing for easy identification of errors or discrepancies. Additionally, it facilitates inventory analysis, such as inventory turnover or cost of goods sold, which can help optimize your inventory management strategies.
This is the only system I have experience with. Very useful for tracing item to ensure you don't run out of item for customers or equipment repairs.
When determining which inventory system is best for your business, there are a variety of factors to consider. For example, the nature and size of your business, the type and value of your inventory, and the level of control and analysis needed. If you have a small or simple business with low inventory turnover and few transactions, a periodic inventory system may be sufficient. On the other hand, if you have a large or complex business with high inventory turnover and many transactions, a perpetual inventory system may be more suitable. Additionally, if you have low-value or homogeneous inventory that does not vary much in quantity or quality, a periodic inventory system may be adequate. However, if you have high-value or heterogeneous inventory that changes frequently in quantity or quality, a perpetual inventory system may be necessary. Finally, if you do not need detailed or real-time information on your inventory levels and performance, a periodic inventory system may be enough. But if you need precise or timely information on your inventory levels and performance, then a perpetual inventory system may be more helpful.
Considering the relatively low cost of many real time inventory management systems, there really isn't a case for relying on the periodic model. Most allow you to track inventory and PO's for multiple vendors, and easily tie in to most accounting systems.
No matter which inventory system you choose, there are some best practices that should be followed for effective and efficient inventory management. This includes conducting regular physical counts or audits to verify records and identify errors, implementing policies and procedures to prevent waste, damage, or theft, using appropriate inventory valuation methods to calculate cost and value, and monitoring inventory performance with relevant metrics. Inventory management is not a universal solution, but rather a strategic choice that depends on business goals and needs. By understanding the advantages and disadvantages of periodic and perpetual inventory systems, you can select the best method for your business and optimize your inventory operations.