The Ultimate Guide to a Successful Perpetual Inventory System
Tanu Chaturvedi Tiwari3/11/2022What is perpetual inventory system ?
A perpetual inventory system is a method of inventory management that keeps track of what items are in stock at all times. This type of system is used by retailers and manufacturers to help keep track of their inventory and reduce the amount of time it takes to replenish their inventories.
What is the Perpetual Inventory System?
The perpetual inventory system refers to the inventory method of continuous counting and updating stocks after every transaction through electronic devices, especially a point of sale (POS) system. Typically, there are two inventory count systems- perpetual and periodic. The perpetual inventory system requires supply chain management software installed on a POS system and barcode scanners. The perpetual inventory system keeps real-time track of stocks, unlike the traditional periodic that requires manual stock keeping. Stock levels are automatically updated in your account books accurately, reflecting the exact numbers of finished goods in your store.
How does the perpetual inventory system work?
In a perpetual inventory system, the inventory count updates continuously with every transaction. A perpetual inventory system is more effective and accurate than periodic inventory systems of accounting for inventory, as it uses digital devices, such as POS systems. Small businesses use a digitized method of accounting for inventory levels in a perpetual inventory system instead of keeping track of physical inventory.
Below are the steps of how the perpetual inventory system works-
1- Update inventory levels on POS system-
When a product is sold or purchased, the Inventory Management system linked to the POS system immediately updates the inventory counts on all sales channels. The linked barcode and RFID scanners allow small businesses to quickly and easily calculate their inventory counts.
2- Automatically update Cost of goods sold (COGS)
The inventory management system uses the data from the last step to automatically update and recalculate the cost of goods sold (COGS). The cost of goods sold is calculated by adding beginning inventory and purchases made during a period and subtracting ending inventory from the sum.
COGS = Beginning inventory + Purchases Ending Inventory
You can use perpetual inventory costing methods, such as last in first out (LIFO), First in first out (FIFO), or Average cost.
3- Reset the reorder points
The perpetual inventory system updates the reorder points automatically based on the data captured on the POS system every time sales increase or decrease, maintaining optimum inventory levels at all times.
4- Generate purchase orders automatically
After new reorder points are generated, the perpetual inventory system automatically generates new purchase orders. The purchase orders are sent to the suppliers without any human effort.
5- Scan received goods into inventory
After the inventory reaches your warehouse, the warehouse manager will scan the received goods using a barcode or RFID scanner. The scanned products will be added to your inventory account and appear in the inventory management software, and are available for sales on all sales channels.
Benefits of A Perpetual Inventory System
Inventory Management is a key part of running any business. A perpetual inventory system can help you avoid costly mistakes and unexpected costs by providing the right amount of inventory at all times. Learn more about the benefits of implementing a perpetual inventory system in your company.
A perpetual inventory system has several benefits. Unlike the periodic inventory method, the perpetual inventory method provides real-time, digitized data that is effective and accurate.
Top Inventory Management software like Zipinventory allows small business owners to know when new inventory stocks are required to fulfill a customer order. You can eliminate human errors and reduce labor costs.
Let's read some of the benefits of the perpetual inventory system-
Updates real-time inventory levels
Small business owners can record inventory levels in real-time with every transaction of goods purchased or sold. Perpetual inventory system requires a POS system and barcode or RFID scanners that record accurate stock levels in your store, ensuring that your stocks are up-to-date.
Reduce bottlenecks in the supply chain
Perpetual inventory system continuously updates inventory levels, allowing small businesses to track inventory levels accurately and creating reorder points when required. The system eliminates any bottlenecks in the supply chain and makes the Inventory Control process seamless.
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Reduce the cost of inventory management
Small businesses can update their inventory counts in real-time with a perpetual system that reduces inventory carrying costs and allows them to know when to reorder stocks. Perpetual inventory system automates several manual processes that save costs and time.
Calculate inventory levels anytime
Perpetual inventory system continuously updates the inventory levels that allow you to calculate inventory balance anytime. You do not need to wait for a fixed accounting period to generate sales reports, as you can analyze raw materials anytime you want.
Accurate demand forecasting
Perpetual inventory system provides real-time updates of inventory levels, making it easier for small businesses to predict customer demand and raw material requirements. You can use historical sales data to forecast future sales cycles make sure that you have all essential raw materials around the year.
Difference between a perpetual and a periodic inventory systems
Perpetual and periodic inventory count methods are two main systems for inventory accounting Periodic inventory method is a traditional way of inventory accounting and requires fixed intervals, such as monthly or quarterly for inventory tracking and updating. The perpetual inventory method continuously updates the inventory account every time a purchase or sale of finished goods is made.
Here are some main differences between perpetual and periodic inventory systems.
Inventory update- Inventory in perpetual systems is updated automatically and continuously with each transaction. On the other hand, inventory counts in periodic systems are updated manually at preset intervals.
Calculate COGS Anytime- Small businesses can calculate COGS anytime with the perpetual inventory system as stocks are updated continuously. Periodic system update inventory levels on preset intervals that allows small businesses to calculate COGS monthly, quarterly, or yearly.
Method of Implementation- Perpetual systems require an inventory management system to implement to track large numbers of transactions. Periodic systems require manual implementation, which is time-consuming.
Error Detection- Perpetual management system allows easy detection of errors as inventory accounts are up to date. Periodic inventory systems require manual implementation, making error detection complicated.
Perpetual Inventory Costing Methods
Inventory costing is a system in which stocks are valued at the cost of their direct materials and allocates the cost of indirect items or services to each product. In this way, inventory costs can be calculated on an ongoing basis. Perpetual inventory costing methods are time-based, taking into account the time elapsed since products were manufactured. This type of method includes both perpetual inventory valuation systems and perpetual inventory valuation methods.
Perpetual inventory systems work under three cost methods described below-
First In First Out (FIFO)
In First-in-first out (FIFO) method, the oldest inventory stocks are disposed of first and assigned to the COGS. As the name suggests, a business first sells the oldest stock, while the newest stocks are the last to be sold. The FIFO method increases the net income as stocks purchased earlier at cheaper rates will be utilized first. The FIFO method allows businesses to earn a higher value of the final stock, lower COGS, and more profits during inflation.
Last In First Out (LIFO)
In the Last in-first-out (LIFO) inventory method, the most recent inventory stocks are sold first and assigned to the COGS. Typically, small businesses with large inventory use the LIFO method, allowing them to benefit from tax exemptions by including the costs of recent stocks purchased at higher costs in the COGS.
Moving Average (MA)
In the Moving Average method, the average cost of a unit is calculated after every goods acquisition. In the moving average method, the cost of the newest inventory is added to the cost of existing raw materials in the inventory. The value derived is then divided by the new total number of goods.