Back to Basics: Perpetual Inventory

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Perpetual InventoryWhen it comes to inventory, keeping an accurate record is crucial. This way, you would be able to tell exactly what stocks are available, what stocks are nearing zero, which ones move the fastest, and which ones are rarely sold. The Perpetual Inventory system makes all this possible, ensuring that companies utilizing the system can operate as smoothly as possible.

What is Perpetual Inventory (PI)?

Also called “continuous inventory,” perpetual inventory is a system in accounting wherein inventory information are constantly updated. Each transaction, whether adding or subtracting from the stock, are immediately taken into account, therefore keeping the inventory up to date. It is only with the advent of computers did this system become common. With scanners and high-speed computer processing, sellers can set up their computer programs to automatically subtract from the inventory, add new shipments, and even alert operations if the stock is running low.

Benefits of Perpetual Inventory

From the outset, there’s no question that the perpetual inventory system is better than the periodic inventory system used prior to the popularity of the computer. However, there are actually more benefits to this after a thorough study. Following are the different positive aspects of using this system in your business:

Up To Date Count – the perpetual inventory system allows you to find out exactly how much stock is remaining at a specific point in time. Say, you have fast-moving products and want to find out how much you still have on Monday at exactly 3PM. Now, 3 hours later and your products are still selling – you want to find out exactly how much has been sold between 3PM and 6PM – this is something that the PI system can give you definitely. It doesn’t matter if there’s one hour or two hours of difference between the sales – your stock count will always be close to accurate with the point of sales system.

Physical Count Verifications – all companies still go through an actual count on a routine basis. Having a PI system makes it easier for the business to complete an actual count since all they have to do is check the stocks on the computer and compare on the amount they managed to get. With an old inventory system, the amounts will have to be computed first and then checked and rechecked before an actual count is attained.

Low Margin of Error – computers have very little margin of errors. In fact, when it comes to inventory systems that utilize basic mathematics, the margin of error is practically zero. This increases your confidence in the accuracy of the results.

Anti-Theft – the beauty here is that when paired with a point of sales system, a perpetual inventory system can help unmask theft of the stocks. If there’s a significant discrepancy between the physical count and the computer count, then the company can easily track down which products are missing and hopefully uncover any illegal activities should there be any.

Accurate Financial Statements – in accounting, there are two very important factors that must always be taken into consideration when making financial statements: accuracy and timeliness. With the perpetual inventory system, you’ll be able to achieve both with ease. This leads to equally accurate financial statements which summarizes the profit margin of the company and essentially used to predict every other move the business will be making from that point.

Timely Stock Replenishment – out of stock problems can lose your business lots of money, which is why it’s crucial to keep the stock replenished and continuously able to provide to your clients. When set properly, a perpetual inventory system can alert you in the event of low stock so you’d be able to place an order before the count gets too low.

Prevent Stock Deterioration – companies either use the “First in First Out System” or “Last in First Out” system on their stocks. Regardless of what process is used in dealing with inventory, the perpetual inventory system can utilize dates to alert the management on stocks that need to be moved from stock, otherwise suffer from defect problems. With this kind of tracking, the chances of losing money through scrapped products is minimized.

Allows For Strategic Planning – an excellent benefit of the perpetual inventory system is its ability to provide valuable information for planning purposes. A company can easily detect patterns through the system, allowing them to find out the usual times when stocks are moving fast off the shelves or when they’re staying put due to low sales. This makes it possible for the management to make marketing plans, operation strategies, and essentially develop a system that could help with the efficiency of operations.

Management Control – perpetual inventory also ensures that the management retains complete control on their stocks and operation while still discouraging theft. Connivance is easily prevented because management heads can be given limited access to the system, pertaining only to the operation sector that they’re involved in. For example, the Buying Branch can only enter products ordered or received while the Sales Department only enters products sold through their point of sales system. This keeps the operation streamlined with any problems easily traced to the people responsible.

How Perpetual Inventory Works

A perpetual inventory system doesn’t just inform you of the basic balance of the company stock. Instead, it will itemize each transaction, often grouping it based on the type of transaction (added, sold, in transit). It can also indicate dates so you’d find out exactly what items arrived when. Following are some of the updates often covered by a perpetual inventory system.

– Received inventory items
– Items moved from one store house to another
– Items delivered to a client, possibly in transit
– Items confirmed delivered
– Items from the inventory utilized in the production process
– Items deemed unfit for use and scrapped
– Items ordered and received

Of course, perpetual inventory systems vary from one company to another, depending on the nature of their business. Manufacturing companies may have a different system compared to a buy and sell business. In the end however, a perpetual inventory system does what it’s supposed to do: keep the management updated on every single transaction that relates to stocks.

Justin Velthoen

Justin Velthoen

Justin Velthoen has 20 years of supply chain experience, from food distribution to manufacturing, to systems management and implementation. His primary focus is helping businesses realize the cost savings directly to their bottom line.

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