What are the pros and cons of using a perpetual inventory system for your business?

1 Benefits of a perpetual inventory system

One of the main benefits of a perpetual inventory system is that it gives you a clear and updated picture of your inventory status at any given time. You can monitor your stock levels, avoid stockouts or overstocking, and optimize your inventory turnover and cash flow. You can also track the cost of goods sold (COGS) and the gross profit margin for each product and transaction, which can help you improve your pricing and profitability strategies. A perpetual inventory system can also reduce the errors and discrepancies that may arise from manual counting and recording of inventory, as well as the time and resources required for physical inventory counts.

2 Challenges of a perpetual inventory system

Despite its advantages, a perpetual inventory system also poses some challenges and limitations that you should be aware of. First, a perpetual inventory system requires a significant investment in software, hardware, and training to set up and maintain. You need to have a reliable and compatible accounting and inventory management system that can record and process the inventory data accurately and efficiently. You also need to have barcode scanners, RFID tags, or other devices that can capture and transmit the inventory information to the system. Moreover, you need to train your staff on how to use the system and follow the procedures and policies for inventory control.

3 Comparing with a periodic inventory system

A periodic inventory system is a method of accounting for inventory that updates the records only at the end of an accounting period, such as monthly, quarterly, or annually. This system is simpler and cheaper to implement and operate than a perpetual inventory system, as it does not require sophisticated software or hardware, or frequent physical inventory counts. However, this system also has some disadvantages, such as not providing real-time information about inventory levels and performance which can affect decision making and planning. Additionally, it does not allow you to track the COGS and gross profit margin for each product and transaction, which can negatively impact profitability analysis and pricing strategy. Moreover, this system is more prone to errors and discrepancies due to manual counting and recording of inventory, as well as theft, damage, or spoilage of inventory that may go unnoticed until the end of the period.

4 Choosing the best inventory system for your business

The choice between a perpetual and a periodic inventory system depends on several factors, such as the nature and size of your business, the availability and affordability of technology, and the legal and regulatory requirements. If you have a large and complex inventory with high turnover and value, or if you sell perishable or seasonal products, a perpetual inventory system may be more advantageous as it can provide more accurate and timely information. Conversely, if you have a small and simple inventory with low turnover and value, or if you sell durable or non-seasonal products, a periodic system may be preferable as it can save time and money. Additionally, depending on your industry and location, certain accounting standards may be required to be followed which could impact your choice of inventory system. For example, some tax authorities may require a perpetual system for reporting income and expenses while some auditing bodies may require physical inventory counts at certain intervals.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?