There are two methods for tracking and accounting for your products: the periodic and perpetual inventory systems. The periodic system is easier to start out with because it is less complex, but we’d suggest the perpetual inventory system for all but the smallest of businesses. It’s a more accurate system for your business to grow into, and it allows you to trace products through your system if you ever need to audit them.
In this article, we’ll dive into how each system works, and how they differ from one another.
Periodic inventory tracking
The periodic inventory system involves counting inventory and inventory value at regular intervals, like a series of checkpoints. Depending on the business, this means that inventory counts occur on a weekly, monthly, quarterly or even annual basis.
It’s common for businesses to use a periodic inventory system at first because it’s straightforward: you buy products for a set amount of money (beginning inventory), purchase more inventory when needed, and then count your products at the end of the period (ending inventory). Those three numbers are used to calculate the cost of goods sold (COGS) during that period.
Written as a formula, here is how you’ll find the cost of goods sold while using a periodic inventory system:
The upside of periodic inventory is that it doesn’t require any special equipment or inventory software — just paper or a spreadsheet to track the numbers. Time is the major consideration when dealing with periodic inventory and how often your business will run an inventory count.
Counting at intervals
Weekly counts allow you to easily spot irregularities in inventory due to theft or breakage. However, weekly counts take more valuable time out of the work schedule. Full inventory counts involve tallying all products in every storage locations at the end of the week, in order to know how much stock you have going into the following week.
You can extend the interval between counts to a month or a quarter, but this reduces overall inventory accuracy. There are longer stretches of time that your business is not entirely sure of how much is in stock. After all, it’s tougher to remember what happened earlier in the month rather than earlier in the week. These longer intervals also make forecasting and reordering more difficult because it isn’t obvious exactly when you need to reorder products. That lack of information is compounded further if you manage the inventory for multiple locations or stores.
If you’re using a periodic system, it can be difficult to manage the compromise between higher accuracy of frequent counts and the lower accuracy of more infrequent counts. This is where the advantages of a perpetual inventory system come into play.
Perpetual inventory system
Whereas periodic inventory systems can go through weeks or months without a complete count, a perpetual inventory system records each inventory movement (or transaction). This includes purchasing or selling products, and transferring products between locations. By tracking each of these transactions, your business can always answer the question “how much stock do we have?” This also means that forecasting sales and reordering become easier, since you’ll know exactly when (and how often) a product has sold out.
You’ll still need to run full inventory counts under a perpetual system, but the bulk of the work is done at the transactional level — recording things as they happen. Having a fully barcoded inventory system makes the tracking process accurate and easy. Each time a product is purchased, sold, or moved, the corresponding barcode can be scanned into inventory software like inFlow Cloud. This process ties the product to a particular set of orders, and makes it possible to trace the route of products through your business.
Tracking COGS in perpetual inventory
Using a perpetual system also changes the way that COGS is calculated. Because beginning inventory, ending inventory, and purchases are tracked on an ongoing basis, the cost of goods sold can be calculated at any time. We’ve covered the most common methods of tracking COGS in a perpetual inventory system: the moving average costing method and the FIFO/LIFO costing method methods.
Move your inventory with inFlow
It does take more equipment and planning to use a perpetual inventory system, and this is treated like a significant barrier to entry by some small businesses — but it doesn’t need to be.
Barcode scanners are available for under $100, good barcode printers like the Dymo LabelWriter 450 cost less than $150, and inFlow Cloud subscriptions start under $100 per month. When compared to the ongoing costs of paying your staff to count inventory on a weekly or monthly basis, the costs start to even out.
If you’d like to upgrade your inventory system to record changes as they happen, inFlow Cloud can help!