An Overview of Perpetual Inventory System

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The perpetual inventory system enables an entity to see a record of each sale, purchase made, the remaining stock as well as the value of that stock. This system has become possible because computers became too sophisticated to allow integration of order-entry or point-of-sale information with the inventory systems. This integration has been further helped by the use of such technologies as bar codes. Before the adoption of this process, business relied up on periodic inventory system. The system requires updating or adjusting inventory balance only once a year. The system is usually used by small entities that don’t require or can’t afford electronic tracking systems.

Perpetual Inventory System

What Does A Perpetual Inventory System Do?

As mentioned, perpetual inventory systems allow entities the ability to update inventory accounts whenever a product is purchased or sold. This system relies on technology to instantaneously track the performance of inventory and send updates to central databases. For instance, an entity might use RFI, Radio Frequency Identification tag readers to scan goods at the point of sale. A POS, Point-of-Sale software on a computer captures the information of the sold item, and then sends the information automatically to the business’ central accounting database.

What Should Your Perpetual Inventory Contain?

Since a perpetual system does not rely on physical inventory counts like periodic inventory system, there’s no need to update your accounts once in a year. It’s important to update your inventory every now and then. Unless you opt for a physical count, you may not unmask faulty, missing or damaged inventory. Even worse, it’s easier for dishonest store keepers to commit fraud if there is no audit of inventory counts. Whenever you check your records, all off your accounts ought to match. If they don’t, check for errors in your system and then match it with a physical inventory to account for any other error.

What Should You Take Into Account?

When updating your inventory and cost of goods sold, several aspects should be taken into account. First and foremost, compare the costs of your stock to your sales to make sure your prices reflect the income you expect to generate. Aside from the cost of the inventory you are purchasing, consider other costs such assembly, shipping and insurance costs. Compare the traffic of the incoming inventory and the outgoing inventory to make sure you are ordering the right quantity. The cost of inventory does not stop when you receive your goods. Storing your inventory will only shoot your expenses through the roof.

Who Benefits From Perpetual Inventory?

Businesses of all sizes can benefit immensely from perpetual inventory system. In the past this task involved calling someone in the warehouse to check discrepancy in their stock levels. Often times, this meant sending someone out to the company so as to do a physical count of the inventory. Depending on the size of the company and the amount of stock on hand, such a simple task could take hours or even days to complete. This is why the practice is beneficial to a variety of businesses. The process is fast and simple, saving companies a great deal of time.

The Benefits of Perpetual Inventory to Businesses

Accurate financial information

With perpetual inventory systems, the cost of products sold is always up-to-the-minute, giving key stakeholders a clear picture of the business’ profitability throughout the year. This is especially essential if certain financial records have to be kept for banks or other financial lenders. The system is effective when backed by computer database of the bin locations and the amount of stock, which is updated regularly by sales clerks via point of sale terminals or by warehouse employees using wireless bar-code scanners.

Up-to-the-minute information

Another benefit associated with perpetual inventory system is up-to-the-minute information.

Perpetual inventory system allows business owners to know the quantity of inventory on hand at any particular time. This allows them to immediately identify when stock is running out and gives them accurate information concerning inventory value and cost of goods sold. These unmask any discrepancies, shrinkage, theft, or even count errors that can negatively affect the business.

Provide accurate information

A perpetual system connected to the inventory management system will give you up-to-date reports about stock value and cost of product sold. This prevents the accumulation of slow moving products that can have catastrophic effects for your business. Under this system, the stock quantities are correct and the stock turnover ratio is calculated accurately. The turnover ratio is the key measure for assessing how effective business owner is at managing his business’ inventory and making sales from it.

Allows for a paper trail

A paper trail is important to running a business. The more information that a business owner can accumulate on his business, the more in depth the paper trail will be. Adopting perpetual inventory systems will protect the business against allegations of wrong doing and provides it with inarguable evidence that it is in line with the law. In addition, it records interactions that are helpful for demand prediction and other performance pointers down the line.

Facilitates tracking of inventory

Small entities can often falter because of poor inventory. When goods start flying off your shelves, you might want to rejoice. However, you also have to keep good track of the stock to prevent running out-of-stock and losing clients as a result. In perpetual inventory systems, changes to inventory quantities are recorded in real time, allowing users the ability to run reports that may immediately identify goods that are running low or are about to run low.


Perpetual inventory offers business a plethora of benefits. This higher level of control helps businesses keep up with demands of their customers. The main drawback associated with this practice is that it involves the use of technology that may be out of reach for some businesses. Because the system relies on barcode errors, it is also at risk when fluctuations occur. However, if a business can afford it, this is a small price to pay compared to the benefits it offers to businesses.


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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