If your business deals in inventory, it is essential evaluate your approach to inventory management and how this compares to other approaches. Many businesses use a periodic inventory management, a system where inventory information is updated from time to time, rather than making changes to inventory records at the time that stock levels actually change.
How does periodic inventory management work?
Under a periodic system, inventory information must be updated by way of a stock take, a physical count of everything that is in inventory. These stock takes are often undertaken on an annual basis, although some businesses may carry out a stock take more regularly. Periodic inventory management only records the stock count at the beginning of the period; purchases and sales of inventory throughout the period are instead recorded on the balance sheet. This means that the cost of goods sold does not continuously exist – rather it is determined at the end of the period. Because a periodic approach to inventory control is simpler and less expensive to initially set up, it can be a particularly appealing option to a small business.
For example, consider a small footwear retailer who uses a periodic inventory management system. At the start of the financial year (or any other period – this is an arbitrary choice), the store staff will carry out a stock-take, updating inventory information and thus allowing the cost of goods sold for the prior year to be determined. This stock take figure is not updated until the next financial year.
Are there other ways to keep track of inventory?
Yes. A common way to control inventory is perpetual inventory management, which is what Unleashed is based on. This differs from the periodic approach in that inventory information is continually updated as inventory is acquired and sold. Moreover, managers in the business can always refer to a current cost of goods sold, and more importantly, accurate product margins.
So should you consider adopting a perpetual inventory management system, or will a periodic approach be sufficient?
The answer is, it depends. Periodic inventory management can be more than sufficient for some very small businesses. The main advantage over a perpetual system is the lack of investment required in developing processes and procuring software. However, an easy to use perpetual inventory system such as Unleashed is now available to businesses at a lower cost.
On the other hand, adopting a perpetual inventory management system can pay dividends for almost any business that has inventory. From an accounting perspective, the perpetual approach keeps inventory information and the cost of goods sold current throughout the year which can be important if, for example, a lender requires a certain ratio or other condition to be met.
Perpetual inventory management does not just deliver accounting benefits, however – keeping stock levels updated in real-time allows inventory management to be a source of business intelligence. Under a perpetual system, the small footwear retailer we discussed above can always correctly calculate the inventory turnover ratio. This allows the business owner to understand how sales are trending, both generally and for specific products. The retailer is also able to see what products are running low on stock, and to can thus reorder to suit. This means that he is much less at risk of losing business after running out of a popular item!
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.