In the current competitive and rapidly changing business world, the need to track their inventories accurately becomes imperative for businesses that derive their revenue streams from the sale of products. It is against this background that the perpetual inventory system has emerged as one of the most crucial tools for businesses seeking to enhance their inventory management methods.
Unlike the older systems in use, the perpetual inventory management system updates the inventory levels in real-time as every business transaction takes place, and as a result, the business always keeps track of its current levels. For the sake of clarity, in the next points, we shall discuss the way the perpetual inventory management system operates, its features, as well as the numerous benefits the business derives.
How Perpetual Inventory Systems Work
The perpetual inventory system is an accounting and inventory control system that maintains constant and constant updates to the inventory based on the various transactions that occur. The moment an item is bought, sold, returned, and/or transferred, there is an immediate change in the inventory levels. This is quite different from the periodic inventory system, wherein there is an update only at the end of the predetermined.
The perpetual inventory system uses technology extensively with the aid of various software applications that coordinate point-of-sale (POS) computer systems, inventory management computer systems, or even barcode scanning/RFID systems. This means the perpetual inventory system is completely automated with minimal chances of human error with respect to inventory recording.
Practically speaking, when the product is sold, the system automatically reduces the quantity of the product in the inventory, while at the same time, when the new inventory is replenished, the system increases the stock. This ensures that the inventory system is always up-to-date. The reduction in the quantity of the product in the inventory is done in real time, giving the business the correct information regarding the level of the inventory.
Key Features of the Perpetual Inventory System
1. Real-Time Inventory Updates
One of the most notable advantages of the perpetual inventory system is its ability to reflect changes in the stock in real time. Every time a sale, purchase, or return takes place, the system is automatically updated. The effect of this is that businesses can never have an inaccurate record of the stock they hold. The system works best in environments where the demand is constantly fluctuating due to the unpredictability of the market.
2. Automation & Integration
By automating the process that characterizes the perpetual inventory system, there is no need for manual processing in managing inventories. Using barcode readers or RFID technology, businesses can easily record their inventories as they sell or acquire them. Another point to note about the perpetual inventory system is that it is integrated with various processes in any business. This makes it possible for businesses to get a thorough insight into their activities. It does not matter whether one is dealing with accounting, sales, or purchases.
3. Accurate Cost of Goods Sold (COGS) Calculation
The perpetual inventory system also makes it easier to automatically calculate the Cost Of Goods Sold when goods are sold. This results in the Cost Of Goods Sold being up-to-date because the levels of goods in the inventory are constantly being monitored. This benefit can be important when it comes to financial reporting because the financial position of the business will be more accurately reflected, and financial decisions can be readily made based on this information.
4. Multi-Location Inventory Management
In the case of a business with multiple warehouses, distribution centers, or stores, a perpetual inventory management system allows the business to be able to manage the inventories in a more centralized manner. This system gives the business a snapshot of the level of the inventories in the different locations to be able to ensure that the products reach the different locations and that there is neither a shortage nor overstock in the locations.
5. Inventory Valuation and Reporting
In addition to giving real-time updates related to the levels of the inventory, the perpetual inventory management system keeps track of the value of the inventory at any point in time. Based on the increase or decrease in the levels of the inventory, the value of the inventory is automatically calculated, making it easier to track the effect of the inventory on the business. Report generation related to the inventory is also completed by the perpetual inventory management system.
6. Reduced Stockouts and Overstocking
The most common stockout and overstocking problems exist together: when the products are out of stock before their supply is renewed, and when there is too much inventory on hand, which binds capital and boosts storage costs. The perpetual inventory system enables a business to avoid this problem by showing current data on the level of inventory. With accurate visibility, businesses can adjust their purchasing strategies, ensure timely reordering, and maintain optimal stock levels to meet customer demands without overburdening their finances.
Benefits of the Perpetual Inventory System
1. Improved Accuracy
Another big plus of the perpetual inventory system is accuracy. Since it updates the records of inventory with every transaction, the system ensures that stock levels are always updated. This way, discrepancies between the physical stock and the inventory records (quite common with manual tracking methods) cease to happen. Accordingly, a business should have full confidence in its data regarding inventory and make wiser, more informed decisions.
2. Better Decision-Making
When the inventory data is visible in real time, companies can make informed decisions with respect to purchasing, sales, and inventory allocation. For example, companies can immediately determine the items that move the fastest in the market, thereby prioritizing their inventory, or they could determine the items that move the slowest in the market, thereby changing their sales approach to enhance the distribution of the inventory items. Additionally, companies can alter pricing, promotion, and inventory restock approaches with respect to market demands.
3. Improved Customer Satisfaction
Customer satisfaction is also directly connected with inventory management. If stockout problems and problems with deliveries occur as a result of inventory errors, customer satisfaction is likely to be harmed, which can result in a loss of business for a company. A perpetual inventory system is not likely to face problems like stockout problems and problems with deliveries, as it provides accurate information regarding inventory status at a given time.
4. Efficient Supply Chain Management
Supply chain management becomes more effective for businesses that implement the perpetual inventory system since this system helps the business keep track of the stocks at any given time. This helps businesses coordinate well with their suppliers and reduce lead times. It is important for businesses to make sure that their stock is replenished regularly in order to avoid delays in production and thus provide better services to their customers.
5. Decreased Operational Costs
One of the advantages of a perpetual inventory system is that it cuts operational costs. Since it is computerized, there is no need for manual inventory processing, hence cutting costs incurred in terms of time and labor. A perpetual inventory system assists a company in preventing inventory buildup, hence tying up money with unsold inventory. Therefore, this system assists companies in keeping inventories at optimal levels, hence cutting storage costs and preventing inventory spoilage and obsolescence.
6. Seamless Financial Reporting
The perpetual inventory system enhances the accuracy and efficiency of the preparation of the financial statements. This is due to the online updates of the levels of the inventory as well as the cost of goods sold, thereby enabling the business to prepare the financial statements in a fast and accurate manner. There shall be little need to make manual corrections towards the end of the accounting period.
7. Scalability and Flexibility
As businesses expand, their requirements for managing their inventories become more complex in nature. In that case, the perpetual inventory system is scalable and flexible and thus suits businesses that plan to expand in the near future. In the case where a company expands its locations, products, or sees an increase in transactions, the perpetual system can manage the complexities.
Difficulties with the Perpetual Inventory System
Even though there are a number of benefits associated with the perpetual inventory system, some difficulties have also been identified, which a business should take into consideration before implementing the process:
1. Initial Setup Costs:
The initial costs involved in setting up a perpetual inventory system can be high, as it involves software costs, hardware costs (such as barcode scanners or RFID), as well as training costs. Such costs might be a hindrance to smaller organizations.
2. Technology Reliability:
Since the system is highly dependent on technology, the businesses must be able to handle the implications associated with potential system breakdowns, software problems, or hardware failures. This is because system failures could hamper the inventory management process.
3. Perpetual Maintenance
A perpetual inventory system needs constant maintenance, which involves updates of the software and the hardware, as well as staff training. In the absence of constant maintenance, the system may become outdated or inaccurate.
Conclusion
The perpetual inventory system provides businesses with the best possible tool to track and control, in real time, the inventory that they hold. The system provides businesses with up-to-date, accurate information regarding the inventory, and this resulting information enables businesses to make better decisions and improve the satisfaction level of their customers while decreasing business costs. Some problems exist in the setup and maintenance required, but they pale in comparison to the advantages. The ever-advancing complexity and the growing use of data-driven decisions will result in perpetual inventory system’s importance.
Whether you own a retail or manufacturing business or are a purely e-commerce venture, a perpetual inventory system can prove to be a blessing in disguise in your endeavor to have a more efficient and profitable business. In the coming years, with advancements in technology, a perpetual inventory system will find a way to improve as well, allowing your business to make even better use of inventory.
