Perpetual vs. periodic inventory: Which one works best for your business?

Makers, traders, and retailers of all kinds know that you can’t get too far ahead in business without learning how to best keep your proverbial house in order. That is to say, the sooner you figure out how to best manage your inventory and all tasks and functions associated with it, the sooner your business will feel less like a chore and more like a valuable enterprise. To that end, we’ll take this opportunity to go over some of the pros and cons of the two main strategy types for keeping your assets in check — periodic inventory versus perpetual inventory. 

What is periodic inventory? 

Accounting through periodic inventory (a.k.a stocktaking) refers to physically counting your stock at specific time intervals, rather than tracking it constantly. This might be done monthly, quarterly, or even just once a year. You might think it’s old school, but there are instances in which it is a very sensible way to keep your ducks in a row. 

Pros of periodic inventory accounting

1. Simplicity of implementation — Since it relies on doing a physical count of items at a predetermined time, it’s easier to understand and manage, which makes it very appealing for businesses that are new to inventory management.
2. Suitable for low-volume businesses — If you have a small business and are managing a relatively small amount of inventory and if your inventory doesn’t sell very quickly, doing a physical count every now and then might be sufficient for your inventory management needs.
3. Less data maintenance — One of the upsides of choosing this inventory accounting strategy for your business is that you won’t be doing day-to-day record-keeping to constantly update inventory levels with every sale or purchase. You count your stock periodically and calculate the cost of goods sold (COGS) for the period in question.
4. Cost-effective — Doing a periodic inventory requires minimal upfront investment, in that there is no need for dedicated software, hardware, or constant data entry and updates.
5. Hands-on troubleshooting — Through physical inventory counts, you can identify problems like damaged or misplaced stock that might go unnoticed in a perpetual system.

Cons of periodic inventory accounting

1. Time-consuming process — Although it does not require much upfront investment, it can be costly in terms of time. Depending on the size and complexity of your inventory, physical counts can be significantly disruptive and require staff to suspend regular operations.
2. Inaccurate real-time data — Between the physical counts you do at predetermined intervals, you won’t have a precise account of your inventory levels. This can translate to overstocking, as well as possible missed sales opportunities due to stockouts.
3. Increased risk of errors — While it’s best to go for a “hands-on” approach in some respects, the human process is prone to human error, and periodic inventory is no exception.
4. Difficult to track trends — By refreshing your inventory data only at specific intervals, you will have a harder time identifying trends in demand or spotting any potential issues like inventory shrinkage.
5. Limited control over your stock — Without accurate real-time visibility of your inventory levels, it can be challenging to react in a timely manner to changes in demand.

What is perpetual inventory? 

As you may have figured out from the name, it is pretty much the opposite of a periodic inventory strategy. With a perpetual inventory, you keep an ongoing account of your stock levels and other data. Tracking is continuous, in real time, and largely supported by a confluence of technologies. 

Pros of perpetual inventory accounting

1. Real-time visibility — Having up-to-date information on your inventory levels constantly is essential to making the best decisions for your business. 
2. Improved inventory control — When you’re working with real-time data, you can easily identify trends, decide on reorder points, and optimize stock levels to minimize both overstocking and understocking.
3. Reduced shrinkage — Employing a perpetual inventory system can help you identify any inconsistencies between the digitally recorded inventory and your physical counts more quickly.
4. Enhanced customer service — Having accurate knowledge on hand about what’s in stock allows you to provide customers with reliable information and satisfy their needs most efficiently.
5. Streamlined operations — With a perpetual inventory system, you can easily automate tasks such as generating purchase orders when the stock reaches a preset reorder point, as well as other tasks that can save your staff precious time and energy.

Cons of perpetual inventory accounting

1. Upfront costs — In order to set up a perpetual inventory system, you will need to invest in software, hardware (like barcode scanners), and other associated costs, such as training for everyone in your company who will need to use these resources.
2. Increased reliance on technology — The accuracy of your system of choice relies on the quality of the software solution you employ. Technical glitches can disrupt inventory tracking.
3. Ongoing maintenance necessities — Even though it allows for a multitude of tasks to be automated, keeping the system itself updated with accurate data requires ongoing attention and effort.
4. Potential for data overload — Working with constant data streams poses the risk of information overload, which might make it more challenging than you think to analyze and interpret your inventory data effectively.
5. Vulnerability to errors — System malfunctions or the occasional data entry inaccuracy can snowball into discrepancies between your recorded inventory and your actual stock on hand.

Perpetual vs. periodic inventory: what’s the difference?

While we’ve already detailed some of the key pros and cons of each of the two inventory accounting systems, let’s zero in on what are perhaps the three key aspects where they diverge.

Inventory tracking methods

The periodic inventory system relies on doing a physical count of all items at specific intervals, to determine stock on hand.

A perpetual inventory system tracks levels continuously through software updates that are performed automatically with every sale, purchase, or other automated inventory movement that you are tracking. 

Data accuracy 

With the periodic count, you will have a less accurate picture of your inventory between physical counts. In a fast-paced commerce environment, this has the potential to expose you to frequent stockouts or overstocking.

The perpetual inventory approach maintains real-time visibility into inventory levels based on your data entry and the automation you choose to implement. 

System complexity

Periodic inventory is undoubtedly the simpler system to set up and manage. However, it is not a very efficient first choice for businesses with high-volume inventory that moves fast.

Perpetual inventory accounting demands investment in software, hardware, and staff training. But its more complex capabilities can be of greater assistance to a growing operation. 

How to pick the right inventory system for your business needs

The best choice for you depends, of course, on your needs and your resources. Consider the above-mentioned pros and cons of the periodic vs. perpetual inventory system and draw your own lists for your specific operation. 

If you run a smaller business and your inventory is relatively easily contained and tracked manually, then a periodic inventory system might be enough to meet your needs at that scale. You decide how often you need to make the count and how to adjust your strategy along the way. Periodically tracking your inventory this way will also incur lower costs and can be done with minimal complexity.

Meanwhile, going for a perpetual inventory strategy can be well worth the initial investment in technology and training. Automated inventory updates based on your sales and restocking purchases save a lot of data entry time and effort, as well as reduce the chances of human error in the tracking process. With a high capacity for complex and vast inventory tracking, perpetual inventory software solutions can adapt to your company’s growth and help you stay efficient at any scale. 

Upgrade your inventory management game with Katana

If your business deals in physical products, then inventory management is a crucial aspect of your operation. Keeping a good record of your stock can save you a lot of headaches down the road, as well as save you time and resources. 

Whether it’s raw materials, work-in-progress inventory, finished goods, MRO inventory, or all of the above, it’s easy to keep tabs on everything with the Katana inventory management software solutions.

• Real-time visibility
• Timely informed decision-making
• Automated inventory transactions
• End-to-end stock management
• Multilocation inventory management 
• Track availability for efficient sales order fulfillment

Get a demo to find out more about how Katana can help you optimize resource planning, production, sales, and more! 

FAQs

Ioana Neamt

Contributing Writer

With more than 10 years of copywriting experience, Ioana has a fondness for longform writing, investigative journalism, cats, and Victorian-style mansions.