Perpetual vs. Periodic Inventory Systems: Which is the Best Fit for Your Business

Any business that holds physical products will need to secure inventory control. Keeping track of stock levels, avoiding stock outs, overdemand or overstocking, and ensuring accurate financial records are all made easier by it. 

Two of the most common inventory control systems used nowadays are Perpetual Inventory System and Periodic Inventory System. Though there is no ‘right’ or ‘wrong’ choice when it comes to selecting the right kind of equipment for your business, each system does come with specific advantages that will serve different kinds of businesses better. 

In this article we dive into the key features, benefits and drawbacks for both systems to assist you in deciding which inventory control method works best for your business.

Perpetual inventory system

Perpetual Inventory System continuously keeps updating inventory records in real time. Every time someone buys, sells or returns a product, the levels of the inventory are instantly adjusted and the same is reflected. Specifically, this system is dependent on technology resources such as barcodes, RFID tags, and point of sale (POS) systems to give full visibility to stock levels in real time.

Advantages Inventory Systems

1. Real-time tracking 

The biggest benefit of a perpetual inventory system is that it gives you up to date data. Because of this, businesses can observe stock levels continuously and get instant access to how often inventory turns over or how available a product may be.

2. Improved accuracy 

Automatic updates every time a transaction happens mean less human error. Because of this, inventory records are more accurate, an important factor for retail and e-commerce businesses where good control of stock is needed.

3. Better financial reporting 

Perpetual inventory systems updates in real time, hence financial statements reflect current inventory values so financial decisions made by the business are informed.

Drawbacks of Inventory Systems

1. High initial costs 

A perpetual inventory system is costly to implement as it involves sophisticated software, hardware and even RFID tags at times. For smaller businesses still on a tighter budget, this may not be possible.

2. Complex setup and maintenance 

Setting up perpetual systems can be difficult, and it is not easily learned by employees without formal training. Additionally, regular maintenance is needed to ensure that the technology functions correctly.

Periodic inventory system

Inventory records are not updated continuously using the Periodic Inventory System. Rather, it uses physical counts of inventory at various points in time—on a month, quarter, annual basis, etc. This system is usually used by businesses that keep a record of starting inventory and purchases, and ending up with a physical count of ending inventory at the end of each period.

1. Advantages

1. Lower initial costs 

The periodic inventory system is less prone to advanced technology or complex software that is needed to implement. Consequently, it fits small businesses with the smallest resources.

2. Simplicity 

Setting up and operating periodic systems is relatively easy. They don’t need to track continuously, therefore cutting down on administrative staff workload.

3. Suited for certain business types 

For businesses with a low volume, high value inventory item (for example, think an art gallery or antique shop), real time inventory tracking may not be necessary, which makes this periodic system more practical.

Drawbacks

1. Inaccurate stock levels 

However, as updates only happen from time to time, businesses might not have up to date information on stock level at any particular point in time. All these can result in stock outs, overstocking and inefficient inventory management.

2. Less insightful data 

Without real-time tracking, periodic systems don’t give access to immediate knowledge about inventory trends or turnover rates and it’s hard for businesses to react quickly to changes in demand.

Which system is best?

Choosing between a perpetual and a periodic inventory system largely depends on the nature and size of your business, as well as your budget and operational needs.

1. Best for real-time inventory control 

Perpetual Inventory System is probably the best option if your business needs a real‐time inventory control system (for example, retails or e‐commerce). You can count on its ability to deliver the latest updates available, keeping you current on data that will aid stock levels, which may help you make quick decisions.

2. Best for small businesses on a budget 

This means that the Periodic Inventory System may be more appropriate for small businesses or those with limited resources. It is easier to manage with its lower initial costs and is simpler, and it’s easier if real time updates are not so important.

3. Hybrid approach 

Some businesses benefit from a hybrid approach, using elements of both systems. For example, they might use a perpetual system for high-turnover items and a periodic system for items with low turnover. This allows them to balance cost and efficiency.

4. Industry considerations 

It can also be predicated on industry specific needs. For instance, retailers appreciate the real time functionality delivered by a perpetual system, and manufacturing businesses that handle raw materials and finished goods could favor the periodics system.

Conclusion

Inventory control is crucial to any organization, and choosing the correct system can affect operations and profitability. Understanding their pros and cons is essential to choosing the right inventory system for your organization, whether you like real-time efficiency or cost-effective simplicity.

For those interested in enhancing their skills in inventory management, financial reporting, and overall business operations, Super 20 training institute offers comprehensive accounting and finance online courses. 

These courses provide hands-on training and practical finance insights to help professionals flourish in today’s competitive business climate. Through Super 20’s online courses, you’ll learn how to adopt effective inventory control tactics and excel in accounting and finance.