Choosing a method by which you will manage all of the various items and parts in your inventory is a very important decision that every small to midsize business owner has to make. And it will determine a lot about how your business operates. Whatever type of inventory management you choose, it is important to have the facts about it and then use it as consistently as possible across your organization. So let’s give you the facts on the two main types of inventory management: Perpetual and Periodic.
Perpetual vs. periodic inventory management
What is the importance of inventory management? Without accurate knowledge of your inventory level, 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 the inventory item that was 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 inventory control systems is how often inventory data is updated.
The periodic inventory management 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 control system after a specific period of time.
The periodic inventory system is most useful for a small business that maintains minimal amounts of goods inventory. For them, a physical inventory count is easy to complete, and they can estimate reasonably accurate cost-of-goods-sold (COGS) figures for interim periods. However, there are also several problems with this inventory control system:
- It does not yield any information about COGS or ending inventory balances during interim periods when there has been no physical inventory count.
- You must estimate COGS during interim periods, which will likely result in a significant adjustment to COGS 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 inventory management 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 physical inventory level. And when inventory records get updated in real time, the company saves time and money by lowering inventory cost, optimizing inventory tracking, 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 for accurate inventory forecasting, then the perpetual system may be the better option:
- Point-of-sale scanning equipment and software
- Mobile warehouse solution
- Inventory management software
Fishbowl is one of the best tools for managing your inventory or stock level, especially if you prefer the perpetual inventory method. To see how Fishbowl makes perpetual inventory management more managable for SMBs, request a demo.