Perpetual Inventory System vs. Periodic Inventory System: Pros & Cons
By Samuel Kellett
It's an important question: perpetual vs periodic. However, the main difference between a perpetual system and a periodic system is easy to understand:
- A perpetual inventory system is constantly updated as each sale / order happens; AKA perpetually updating the data.
- A periodic inventory system is updated manually after each accounting period; AKA periodically updating the data.
Now let's go a little deeper to examine the pros and cons of each system, so you can decide which is right for your business.
Perpetual Inventory System
What is a Perpetual Inventory System?
Perpetual inventory system definition: the perpetual inventory system (AKA continuous inventory system) is a method of inventory management that operates in real time. It's run most effectively with a computer database, AKA and Point of Sale (POS) system, keeping track of orders and inventory levels. Warehouse employees and sales clerks update the system in real-time by scanning product codes into the POS system.
Keep in mind: even though the stock levels in a perpetual inventory system are updated in real time, you still have to double check your numbers with the occasional manual audit. The perpetual inventory method does not account for theft, product going missing, product deteriorating, etc.
Perpetual Inventory System Pros
- Knowing your stock levels in real-time allows for more accurate and efficient reordering decisions — you'll know as soon as you reach your reorder points.
- Real-time transaction data gives you insight into which of your products are selling well and which are not
- A centralized system makes it much easier to track stock across multiple locations
- Continuous updates make it faster to check if a product is in stock — a key thing to know for same-day orders
- Allows for management to have more direct inventory control
- Much simpler integration with an inventory optimizer or price optimizer. (should link to the relevant videos)
Perpetual Inventory System Cons
- Human error — if information is entered incorrectly or not at all, your records will be incorrect
- Large up-front investment to purchase the software and train employees to use it
- It takes time to enter every transaction, every time
Periodic Inventory System
What is a Periodic Inventory System?
A periodic inventory system doesn’t track the items as they are sold, so the actual stock levels are not available in real-time. Instead, a periodic inventory system relies on doing a physical audit of all inventory at the end of an accounting period to determine if they are ordering the correct amount of each product.
Doing a physical count of the ending inventory allows retailers to find their cost of goods sold (COGS) during that period. Essentially, COGS is the cost of doing business — the expense of acquiring or manufacturing the goods you sell. Using this COGS amount, said retailer can calculate their inventory turnover ratio (ITR).
The ITR informs the retailer of the company’s efficiency in terms of the number of times their inventory was sold and restocked (i.e. turned over) during the period. With this knowledge, they can adjust their inventory levels for the next period accordingly.
Periodic Inventory System Pros
- It’s much cheaper. No software costs, no need to train employees to use a POS system
- It’s a system you can start using without any major preparation, and you can set the period measured to fit your company’s needs
- It’s simpler to use, as long as your business is small
Periodic Inventory System Cons
- You can’t get a truly accurate representation of your inventory until the accounting period is over
- The larger your company grows, the less accurate and useful this system becomes
- The reliance on physical inventory audits also makes this system more time-consuming the larger you grow
- Management has less direct control of inventory levels
Perpetual Inventory System vs. Periodic Inventory System Conclusion
There's a reason the perpetual inventory system is so popular with major retailers. While it's not a necessity for all businesses, perpetual inventory accounting system is generally preferred for any larger retailer selling products.
That said, the initial setup can be expensive, which is why many smaller retailers make do with periodic inventory systems.
If you are in one location, using one cash register, your business probably doesn't need the perpetual accounting that the perpetual system can provide. But if you're starting to scale as a company, then a perpetual method is something you should consider.
Fortunately, regardless of which system you use, you can improve it with an inventory optimizer and a price optimizer. This is much easier to do when using a perpetual inventory system that automatically collects data, but even periodic systems can be optimized, as long as you are manually tracking your stock levels and inputting the data into the optimizers.
If you're ready for a perpetual inventory system, or you're looking to improve your existing system, feel free to reach out to us at Bloomreach for a personalized demo. We'll help you put together the best inventory management system for your business.