Types of Inventory Management

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Choosing a method to manage all those widgets and pieces/parts is a very important decision every small to medium business owner has to make.

Perpetual vs. Periodic Methods

Without accurate knowledge of your inventory, several vital business decisions would be difficult, if not impossible, to make—decisions like setting competitive selling prices, scheduling raw material purchases and scheduling production to replace items that are sold.

Two common methods of managing inventory are Periodic and Perpetual. Choosing which one to use is vital to the success of your business. The main difference between the two systems is how often inventory data is updated.

THE PERIODIC METHOD

The periodic inventory method is one in which inventory data is updated after a specific interval of time, usually a year. This is where the term periodic comes from. Data is entered into the inventory systems after a specific period of time.

The periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. For them, a physical inventory count is easy to complete, and they can estimate reasonably accurate cost-of-goods-sold figures for interim periods. However, there are also several problems with this system:

  • It does not yield any information about the cost of goods sold or ending inventory balances during interim periods when there has been no physical inventory count.
  • You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods sold when you eventually complete a physical inventory count.
  • There is no way to adjust for obsolete inventory or scrap losses during interim periods, so there tends to be a significant (and expensive) adjustment for these issues when a physical inventory count is eventually completed.

This inventory management system appeals to many businesspeople because they don’t have to spend as much money up front to set up the inventory hardware and software needed to keep track of data, like they do in a perpetual inventory system.

THE PERPETUAL METHOD

Under the perpetual inventory method, a business continually updates its inventory records. A perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced level of physical inventory counts. Plus, it saves the company time and money by lowering inventory costs and reducing manpower needed to run the business.

One deciding factor for choosing a perpetual method is the level of technology available. If the company has the ability to record transactions in real time using the following tools, then the perpetual system may be the better option:

Fishbowl is one of the best tools for managing your inventory, especially if you prefer the perpetual inventory method.

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