Periodic vs Perpetual Inventory System – Which is best?

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A common conundrum for businesses looking to become better at inventory control is deciding whether to use a periodic or perpetual inventory system. Whilst this decision ultimately comes down to what best fits your business needs, there are benefits and limitations for either approaches, and of course some major contributing factors to consider.

Periodic inventory systems have often been the default method used by start-ups or small businesses, as these can be manually implemented from day one with minimal investment of resources and expertise. But perpetual inventory systems like Unleashed are becoming increasingly accessible to small businesses that want to optimize or streamline their inventory and accounting processes.

What’s the difference?

Put simply, a periodic system is one that involves the regular or semi-regular counting of stock on hand to determine inventory value and to discover any losses from theft, breakage and obsolescence. A perpetual system, on the other hand, updates the inventory count in real time – after every sale, transaction, transfer or goods-received. While this can be done through the use of manual spreadsheets or cards, it is most commonly – and arguably more effectively – done automatically via the use of inventory or warehouse management software.

Many businesses that use an automated perpetual system will still perform a manual count to discover lost or obsolete stock. This is usually done annually – though sometimes twice a year, depending on their needs.

The benefits and downsides of the periodic inventory system

While perpetual systems are now considered essential for many businesses – like manufacturers, for example – periodic systems do offer some benefits. For businesses selling services, start-ups without much capital, or small businesses with slender resources or minimal stock, using a periodic system is an easy and straightforward method.

One obvious benefit for businesses looking to use a periodic system is the absence of significant set-up costs. Unlike most perpetual systems, a periodic system can be achieved on a shoestring if necessary, the only cost being the labor and time involved in counting.

To use and implement a periodic system, all one needs is a simple formula and a beginning inventory count. That being said, they are often labor-heavy and time consuming – something which increases with the size and scope of the business. If your business operates with a large quantity, complexity, or variety of stock, then a periodic system just isn’t good enough.

In order for a periodic inventory system to be worthwhile, there usually needs to be a regular manual count – usually done at the end of any defined accounting or business period. This can mean paying staff to stay late or come in after-hours, or disturbing the trading hours by closing down; both can create extra costs for the business, something which many deem to be too much of a liability.

Which is best?

In the end, it comes down to what best suits your business. A periodic inventory system might be easy to implement and action, but it lacks the extended benefits of a perpetual inventory system such as a real-time view on margins and profitability.

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Melanie - Unleashed Software

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.

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