Revolutionizing Inventory Control: The Perpetual Inventory System and Its Benefits
July 11, 2023
A perpetual inventory system is a stock management technique that updates stock levels when there are transactions, like sales, purchases, or returns of purchases. This technique can monitor sales and remaining stocks to prevent stockouts and out-of-stock. The software was developed using an Extreme Programming approach and an Agile Development Method, and it was tested in the Black Box to make sure all the necessary features worked. Stock control helps a company be more competitive, prevent stockouts and out-of-stock losses, and increase revenue.
A perpetual inventory system is better than older periodic inventory systems because it keeps sales and inventory levels up to date, reducing stock-outs. This is its advantage. Solving inventory cost analysis issues is gaining popularity. Inventory models were numerous before control systems. Increased efforts have been devoted to the development of novel or amended inventory control systems. There are issues related to computer network congestion control. One applies work-in-progress to account for the destabilizing effect in the perpetual inventory system in order to make a fair comparison between a classical stock-based order-up-to policy and PD with the Smith predictor inventory control system.
Parameters of Perpetual Inventory System
The application of the Perpetual Inventory Method (PIM) requires estimates and assumptions on three parameters:
Service life
However, statistical estimates of service lives are limited. Fiscal data and bookkeeping practices are the most important sources of information. Fiscal sources, annual business reports, and global data are also examined. A table of “best-practice” service lives by asset and industry was created by analyzing and combining all sources.
Discard pattern
It is commonly stated that in PIM, service lives are the only relevant parameter, and discard patterns’ impact is negligible. As a result, in PIM, a simple step function is most frequently used. When capital stock is divided into vintage classes, the delayed linear survival function works well. It is also an approximation to any other survival functions used in this report. The delayed linear method also makes calculations less difficult.
Depreciation method
PIM calculations can include a depreciation pattern in addition to service lives and discard patterns. The calculations, for which the results are shown in the previous chapters, use straight-line depreciation. This indicates that a portion of a vintage of assets is written off annually.
Benefits of Implementing a Perpetual Inventory System
- Because there is always inventory, companies don’t have to close the doors for physical inspection. Moreover, stock forecasting and economic order quantity are made easier by using scanned barcode details.
- It certainly helps you predict future sales cycles by guaranteeing accurate inventory availability during different seasons, like public holidays. Furthermore, it helps in determining the point at which to reorder, which prevents overstocking issues. Also, using Point of Sales terminals helps to calculate when, what, and how much to stock.
- Please be aware that all transactions involving inventory are recorded in the perpetual system. As a result, it is easy to find mistakes. This not only supports the maintenance of total management but also helps direct transaction inquiries in order to facilitate training and operations. Furthermore, it increases the accuracy of inventory records over time.
- The value of the closing stock can be known at any time during the year because of continuous stocktaking. At the end of the financial period, it greatly simplifies the preparation of profit and loss accounts and balance sheets.
- A system of ongoing inventory control ensures that materials and stores are regularly received and delivered. This significantly reduces the investment in materials and minimizes storage expenses.
- A well-designed system for continuous inventory control allows for immediate identification of materials waste, leakages, and theft.
Implementation of a perpetual inventory system
The POS system automatically adjusts your inventory levels when you use perpetual inventory. Inventory management and purchases are made easier when you can always access your inventory reports online.
However, perpetual inventory systems are not always completely correct. Your company’s inventory accuracy can be affected by a lot of things. You may forget to record a transaction or get robbed by your employees. To compare totals, occasionally check your actual inventory quantity.
When it comes to perpetual inventory, the calculations are typically done as you go instead of waiting until the end of the accounting period, which is the case with periodic inventory. Companies that use POS systems and sell valuable goods usually use perpetual inventory systems to count their inventory regularly.
Challenges of Perpetual Inventory System
Although a perpetual inventory system has many benefits, small businesses face some drawbacks. Initial and ongoing costs are higher because it takes more money to buy hardware, software, and training to implement and maintain the system. Regular backups and updates are also required to ensure reliability and security. Strict rules and protocols to ensure data accuracy and consistency increase complexity and workload. Furthermore, data errors and system failures, including human errors, data entry mistakes, and system glitches that may affect inventory records, must be taken into consideration. Backup systems and contingency plans are critical in case of power outages, network disruptions, or cyberattacks.
Perpetual vs. Periodic Inventory Systems
The distinction between the two systems lies in the way they function. Computerized point-of-sale technology monitors sales continuously and instantly in perpetual inventory systems. Periodic inventory systems require a point-in-time count to track sales.
A perpetual system works well for large companies or those with complex inventories. A regular system is often enough for smaller businesses with limited inventory. The same applies to the margin for error—a perpetual system has a lower margin for error, but a periodic system may have a limited, simple inventory.
An important accounting metric, the cost of goods sold (COGS), is calculated by adding the beginning balance of inventory to the cost of inventory purchases and subtracting the cost of ending inventory. In contrast to the alternative physical inventory, COGS is updated continuously with a perpetual inventory system.
Conclusion
A perpetual inventory system is better than older periodic inventory systems because it keeps sales and inventory levels up to date, reducing stock-outs. This is its advantage. Solving inventory management issues is gaining popularity. Inventory models were numerous before control systems. This technique can monitor sales and remaining stocks to prevent stockouts and out-of-stock. The value of the closing stock can be known at any time during the year because of continuous stocktaking. At the end of the financial period, it greatly simplifies the preparation of profit and loss accounts and balance sheets. A well-designed system for continuous inventory control allows for immediate identification of materials waste, leakages, and theft.
However, perpetual inventory systems are not always completely correct. Your company’s inventory accuracy can be affected by a lot of things. You may forget to record a transaction or get robbed by your employees. To compare totals, occasionally check your actual inventory quantity. A perpetual system works well for large companies or those with complex inventories. A regular system is often enough for smaller businesses with limited inventory. The same applies to the margin for error—a perpetual system has a lower margin for error, but a periodic system may have a limited, simple inventory. The distinction between the two systems lies in the way they function.
