Perpetual vs. Periodic Inventory Systems: Which Should You Choose?

December 4, 2024 - 11 minutes read

Making an informed choice between visibility and simplicity.

©Africa images via Canva.com

Audits and cycle counts have always been an important part of the inventory management process, ensuring that recorded information on part quantity, location, and quality matches the physical reality in warehouses and retail outlets. But what if there was a way to have this data continuously available and lessen your reliance on time-consuming counts? That is the basic premise behind perpetual inventory management. While perpetual systems don’t necessarily track every item around the clock, they do come closer to establishing a valuable real-time source of truth.

Like any advanced system or practice, perpetual inventory management offers a long list of benefits that are balanced by risks, costs, and other factors that must be considered. We take a closer look at the pros and cons of this useful practice to help you decide if it is right for your business.              

“The core advantage of data is that it tells you something about the world that you didn’t know before.” – Hilary Mason

What is perpetual inventory management?  

Perpetual inventory management is an accounting practice that relies on real-time data inputs (rather than physical inventory counts) to determine the precise value of stock on hand at any given time. Perpetual inventory practices allow important financial metrics like Cost of Goods Sold (COGS) and Ending Inventory to be calculated at will, rather than waiting for monthly or quarterly inventory counts. Additional characteristics of perpetual inventory include:

• Accurate real-time tracking of inventory levels and stock availability
• Incorporation of cloud-based inventory management software
• Automated MRP adjustments based on sales, purchases, and returns
• Point of sale (POS) systems and scanners linked to the real-time database

Perpetual inventory systems are ideally suited for large companies with complex inventories, but the affordability and availability of cloud-based inventory management solutions also make this option possible for E-Commerce retailers and other small businesses.

Periodic vs. perpetual inventory management

To better understand the nuances of perpetual inventory management, it helps to describe traditional (periodic) inventory management practices and review the important differences. Periodic systems are based on specified accounting periods when all inventory counts and sales are entered and reconciled. Materials received, consumed, and shipped can be determined based on these inputs alone. This means the most accurate data is available just after the close of each accounting period.

Using a perpetual system, COGS can be calculated with precision at any given time, but periodic systems only calculate COGS after each accounting period. The lack of visibility and manual counting methods associated with periodic inventory management makes it unsuitable for many large or complex businesses, but the simplicity of the process makes it a viable option for companies with limited inventory size and diversity.

Benefits of perpetual inventory management

Perpetual inventory provides many significant advantages that make it worth considering for businesses with the requisite inventory complexity and software tools.

1. Real-time data availability

Consistent real-time data provides flexibility and accuracy for accounting functions, but it also benefits the business in many other ways. Real-time data helps to avoid issues like overstocking or stockouts and improves decision-making on replenishment. This visibility can support lean initiatives like just-in-time (JIT) inventory management aimed at keeping inventory levels low to reduce carrying costs and waste. The benefits of real-time inventory data are also passed on to customers who can immediately check on item availability and delivery times.

2. Improved demand forecasting

Demand forecasting is a process used to estimate how much of a given item will be needed to meet future demand. Perpetual inventory management significantly improves the accuracy of demand forecasting practices by providing granular, up-to-date data on sales, returns, and stock movement to establish market patterns. A perpetual system also improves the resolution of historical data that is analyzed along with current market trends to create superior forecasts.

3. Increased inventory turnover  

Perpetual inventory management increases turnover rates by providing the real-time visibility necessary to optimize reorder timing and quantities. With high-demand items available and slow-moving items minimized, overall inventory levels and dead stock are systematically reduced. Higher turnover rates improve the bottom line by accelerating sales cycles, minimizing losses from obsolescence or spoilage, and freeing up more cash for reinvestment.

4. Multi-location inventory management  

Omni-channel commerce and multi-channel commerce practices give customers more options for browsing, ordering, and picking up items while helping E-Commerce businesses reach a wider customer base. These approaches rely on consistent pricing and item availability across platforms to provide a seamless customer experience. Perpetual inventory management ensures retailers maintain inventory visibility for all their online platforms and physical locations continuously.

5. Reduced downtime  

Continuing with business as usual can be difficult or impossible during a cycle count or inventory audit, which makes downtime almost inevitable. While pausing to count may seem logical, warehouse downtime costs businesses an average of $10,000 per hour due to lost revenue and productivity. Perpetual inventory management reduces costly downtime by reducing reliance on physical inventory counts. 

Image source 

Drawbacks of perpetual inventory

Despite the many benefits of perpetual inventory, there are still a few drawbacks and constraints that all businesses should consider before investing in the software and resources required to fully implement this system.

1. Lack of verification    

It may seem counterintuitive, but a continuous stream of electronic inventory data does not always equate to data accuracy. Perpetual inventory management is based on electronic inputs, whereas periodic inventory management is based on firsthand accounts. This lack of physical verification can allow errors, misplaced items, and software malfunctions to go undetected, potentially leading to a disconnect between the physical and electronic systems.  

2. More computer transactions  

Unlike periodic inventory systems that backfill past transactions based on a combination of sales completed and inventory on hand, the concept of perpetual inventory management is based on the real-time recording of every purchase, sale, return, and other transaction. Barcoding and other warehouse automation tools make this objective achievable, but the sheer number of transactions inevitably creates more work and more potential for data entry errors.

“A computer is like a violin. You can imagine it making beautiful music, but you have to learn how to play it.” – Bill Gates

3. System cost  

Putting advanced POS, inventory management, scanning, and tracking systems in place to implement perpetual inventory requires investment, so an implementation decision should weigh the expense vs. the financial benefits of real-time data. Along with the accounting advantages, perpetual inventory also saves money and increases revenue by reducing auditing and holding costs while providing a source of accurate real-time inventory data to improve order fulfillment times and encourage repeat business.        

4. Ongoing need for physical inventory  

Perpetual inventory management is a proactive approach that eliminates the reliance on inventory accounting cycles when calculating COGS and other financial metrics, but it doesn’t eliminate physical inventory counting altogether. Perpetual inventory maximizes accuracy by taking real-time data collection to the next level, but it still leaves gaps that can only be addressed through physical inventory counts, including:

• Verification of stock quality, cleanliness, and fitness for use
• Inventory shrinkage due to errors, theft, or lost items
• Verification of inventory management software integrity
• Correction of unrecorded stock movements
• Compliance and tax requirements for physical audits

Perpetual inventory: Final thoughts    

Perpetual inventory management represents a major accounting breakthrough, with the physical verification we have taken for granted for decades being augmented by the power of real-time inventory tracking. Improved scanning methods, remote warehouse monitoring, and software tools ensure the gap between physical and digital reality will continue to shrink. As perpetual inventory becomes the norm, businesses of all sizes, along with their suppliers and customers, will continue to reap the benefits.

Agiliron offers a suite of cloud-based software solutions to support perpetual inventory and other advanced, real-time applications. Along with inventory management, POS, warehouse management, and full featured CRM, Agiliron also offers an order management solution with complete visibility through each fulfillment stage and seamless integration with wireless barcode scanning tools. It’s no wonder over 2500 brands rely on Agiliron to power their business.

Real-time inventory data was once just a goal, but cloud-based inventory management software has made it a reality. With advanced solutions establishing a centralized source of truth, the time to wait on data and financial results has passed. Contact us today and let our solution experts explain what real-time inventory data can do for your business.