What Is a Perpetual Inventory System? (With Benefits)

By Indeed Editorial Team

Published June 19, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies use different systems to track inventory and improve business accounting operations. Perpetual inventory is an approach you can use to optimize your accounting procedures. Understanding the concept and benefits of perpetual inventory can help you decide whether to implement it in business operations. In this article, we explain what a perpetual inventory system is, discuss the benefits of using it, describe how to implement it, and provide instances of when to implement it to increase business efficiency.

What is a perpetual inventory system?

A perpetual inventory system is a method of accounting for products and services using point-of-sale software. The software continually tracks a company's inventory balance with automatic updates after each inventory sale or supply. For instance, when a customer makes a purchase, the system automatically changes the number of stock available to reflect the sale. It records all inventory changes at the transaction time, enabling authorized employees to view the number of available stocks and make decisions to improve business operations.

Perpetual inventory can also monitor customers' product returns in real-time. While the system provides an efficient inventory count, it doesn't account for stolen or damaged goods. Many businesses using this system also count their inventory physically and compare it to the system for further verification and synchronized records.

Related: Inventory Write-Down: Definition, Causes, Tips, and Examples

Benefits of using this inventory system

Perpetual inventory software provides several benefits for businesses of any size. Aside from recording inventory with an automated process, it also tracks procedures throughout the supply chain. It's also less labour-intensive than systems that require regular physical inventory counts. Here are more benefits of using this inventory system:

Improves accuracy

Because this system tracks transaction records in real-time, it provides more accurate results than other inventory systems. It maintains minimal errors when recording inventory data. This helps promote optimal efficiency and improved accuracy.

Facilitates easier data collection

Perpetual inventory can collect vast quantities of product and consumer data. It keeps a comprehensive record with frequent data updates. It also collects relevant information about the products, such as the source, location, and magnitude. For businesses with several sales locations, the system can centralize the entire stock available at all company locations for easier data collection.

Reduces business disruption

Tracking inventory using perpetual inventory software can reduce business disruption and ensure the continual growth of a business. Companies implementing this digital management system in their operations don't close facilities regularly to perform physical inventories. A business can maintain operations and profitability by opening facilities more often to attend to customers. Perpetual inventory also facilitates complete accountability of products, which helps to reduce thefts and monitor other problems associated with manual counting.

Saves time

Manual inventory counting can be time-consuming, depending on the size and number of inventory available. Perpetual inventory can save employees time by performing this task automatically and allowing employees to focus on other essential duties. This can consequently improve employees' productivity and promote business growth.

Allows for effective monitoring of customers' trends

Perpetual inventory can help company management see which products customers return consistently and which products require regular discounts to sell. It also provides a detailed analysis of stock data to show high-demand products and those with slower sales. For instance, a grocery store implementing this system can review customer buying trends to see the products quickly selling. They can also see the products that mostly expire due to low purchases or demands. This can give the store manager an insight into what orders to increase or reduce from suppliers for effective store management.

Related: What Is a Consumer Analysis and How Does It Help Businesses

Fosters informed decisions

The system gives the company a relatively reliable count of the stock available, which can help with stock forecasts. Businesses can use historical inventory and sales data to predict future demands and prepare effectively for them. The information the system provides can enable company management to make more informed decisions, such as when and what quantity of goods to order from suppliers. This can help ensure there's sufficient stock available at strategic times in all sales locations.

How to implement a perpetual inventory system

You can follow these steps to implement the perpetual inventory management system in a business:

1. Identify basic needs

First, you can identify the fundamental needs of the business. Consider assessing your most vital needs and how this system can help you attend to them to maximize its benefits. If the business already uses complex accounting systems, consider reviewing how the system can integrate efficiently with the existing ones. If the business doesn't have any established accounting processes, you can consider the volume and scope of the available inventory.

This can help determine the software you're likely to use to suit your needs and business capacity. When assessing your perpetual inventory software needs, you can also consider how often you intend to complete physical inventory.

Related: What Are Business Needs? (With Types and Examples)

2. Browse and select a software system

Next, you can browse the several kinds of software available to select an effective one for the business. If the business already uses certain kinds of point-of-sale hardware, you can consider the devices' specifications when selecting software. The point-of-sales may include cash registers, bar code scanners, receipt printers, or credit card readers. You can search keywords like "inventory management software" or "perpetual inventory software" online to get productive results.

3. Add your inventory

After selecting an appropriate perpetual inventory software for the business, you can add your inventory and start using it for daily operations. Software companies often provide training programs to start using their products efficiently. Many also offer on-site integration support. You can utilize these opportunities if available with your selected software company. You can also document experiences with the software for possible future reflection. For instance, if you encounter a complex function, you can note it to seek additional training on that element.

Perpetual inventory vs. periodic inventory system

Both inventory systems employ different strategies but are ultimately useful for the same inventory accounting process. While perpetual inventory manages inventory automatically, the periodic inventory system uses regular physical counts to track the amount of stock available without automatic updates. Companies update the inventory after a designated accounting period with a periodic inventory system, like monthly, quarterly, or annually. Here are more differences between the two systems:

  • Record synchronization: Perpetual inventory often provides more details, so it's easier to identify missing products based on the differences between the digital and physical inventory records. In contrast, it can be challenging to explain discrepancies when using periodic inventory because the system doesn't provide such specific details.

  • Speed: Perpetual inventory records transactions immediately after customer purchases or stock removal. In comparison, periodic inventory can only occur at specific intervals, so you may wait until the next inventory session to access desired records.

  • Flexibility: Users can adjust perpetual inventory software to reflect new products or processes. Periodic inventory is not as flexible because companies can only change records during physical inventory counts.

Related: What Is a Periodic Inventory System, and How Does It Work?

When to implement perpetual inventory to increase business efficiency

There are strategic times when implementing perpetual inventory software can greatly increase business efficiency. Here are a few examples of such instances:

New employees' onboarding

A great opportunity to implement this system is when hiring new employees. This can allow you to have a group onboarding to communicate the processes involved and ensure all employees can handle the new system. You can also schedule an employee training session for all existing company employees. For instance, if a company manages a seasonal clothing line, you can implement the perpetual inventory software before starting a new season. This way, when new seasonal employees report for training, you can integrate the new system software into their scheduled onboarding training sessions.fe

Related: Tips for Training New Employees Effectively (With FAQ)

Adopting new technology

Another time to consider implementing perpetual inventory software is when adopting new technology or hardware in the company. For instance, suppose you're managing a retail store with outdated cash registers for operations. You can decide to purchase new ones to improve business operations. Consider integrating the perpetual inventory software at the same time. If hardware limitations were preventing the software's use, upgrading company technology can be an effective solution.

Growing to scale

A rapidly growing business can implement perpetual inventory in its operations to increase business efficiency. For example, a bookshop owner that recently doubled sales and opened a new location can implement this system due to its scalability. Using perpetual inventory software can reduce stress and labour costs associated with physical inventories. It can also help manage the business's inventory in several locations in an organized manner.

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