In business, the inventory system is how you keep track of your goods and materials. This is an essential part of your business, as good inventory management can make or break a business! If you’re not properly keeping track of your inventory, you’re not maximizing your profit. You also run the risk of running out of cash since you are paying suppliers before you get paid by customers – in most cases the cash conversion cycle is not in your favor.
There are two main types of inventory systems, the perpetual inventory system and the periodic inventory system. The main difference between the two systems is how often inventory data is updated. We discussed the periodic system in a previous post. Today we are going to discuss the perpetual inventory system.
The perpetual inventory method is one in which inventory data is updated continuously. When an order is placed or received, that data immediately is entered into the system to update the quantity and inventory availability right away. This is where the term perpetual comes from. Data is entered perpetually, or continuously, as opposed to the periodic system, where data is updated according to a set interval of time.
The perpetual inventory method has gained in popularity with the rise of computers and technology. In a perpetual inventory system, quantity information is often updated automatically thanks to bar code scans and radio frequency identification. Technology makes keeping this type of inventory control system even easier to use.
Many people like this inventory system, since information is updated immediately and you know that the data you are seeing is the most up to date and accurate as it can possibly be. Sales people can look at inventory and know what products are on hand for quick shipment. Conversely, marketing managers can tell which products are sitting on the warehouse shelf and not selling. Materials managers can look at the inventory and understand when to reorder to minimize the amount of time inventory sits in the warehouse. These are just a few advantages of the perpetual system.
A potential drawback to this system is that there may be a lot of data that needs to be uploaded and if you have been operating without a system for a while, the inventory software can be costly to set up – more in terms of time and frustration than the software cost itself. Most people find however, that the initial investment pays for itself in the end, as this system provides a more complete and accurate total picture of your company and how inventory progresses through your system. I should mention that physical counting is still necessary on a periodic basis to make sure that the system is accurate – so you don’t altogether eliminate this aspect of inventory management. And there are ways to reduce the upfront costs – not all software is really pricey, especially if your needs are fairly limited. Other software can grow with you as the business grows or becomes more complex.
Most businesses that have any kind of physical product really do much better with inventory systems, either periodic or perpetual. The right one is the system that best meets your needs and the needs of your business. Hopefully, this article will give you a bit of background to help you decide which system best fits your needs.
PS: If you want to learn about the inventory management features in Ordoro, please click here.