Periodic vs Perpetual Inventory System: Key Differences

All businesses—especially retail businesses—must track their inventory. It’s how they maintain the right amount of stock, manage and minimize costs, forecast demand, and keep customers happy. How businesses track their inventory, however, comes down to two methods: periodic vs. perpetual inventory systems.

Each method has its benefits and drawbacks and serves businesses differently depending on their operations.

In this article, we compare periodic inventory and perpetual inventory systems, covering the upsides and downsides of each. Our goal is to help you choose the inventory management system that best meets your business needs.

What is a Periodic Inventory System?

With a periodic inventory system, a company physically counts their products at the end of a set accounting period to determine what’s left on the shelves and the cost of goods sold (COGS). COGS refers to the total cost a business has paid out of pocket to sell a product or service, including the cost of the product, any shipping or handling fees, and any other costs directly associated with the sale.

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Rather than updating their books with current inventory and cost levels on an ongoing basis, most businesses do so over a certain period of time. They’ll examine the beginning and ending inventory levels and all purchases made during that period to calculate the total cost. Most companies do inventory on a monthly, quarterly, or annual basis, depending on their product, ordering, and accounting needs.

Because it doesn’t give retailers immediate or up-to-the-minute inventory data, periodic inventory works well for small businesses working with small inventories.

The Downsides of Periodic Inventory Systems

Most retailers need regularly updated information on their stock levels and inventory flow. Even small businesses tend to use inventory tracking systems tied to their POS or online store. While periodic inventory is easy to set up and implement, the system has limitations.

Let’s peek into the downsides of periodic inventory systems: 

Delayed Inventory Information

Retailers using periodic inventory systems update inventory records at specific intervals (e.g., monthly or quarterly), which means they do not have real-time visibility into their inventory levels and COGS. Real-time visibility refers to the ability to see the current status of your inventory at any given moment, which is crucial for making accurate and timely business decisions.

Because inventory data is not continuous and automatic, retailers are delayed in purchasing, sales, and stock management decisions until they complete their manual counts. Lags in inventory information can lead to lags in operational efficiency, and few business owners can afford that over a long period.

Higher Risk of Stockouts and Overstocking

Without real-time data, businesses could struggle to forecast demand accurately and manage their stock levels accurately. Periodic systems could thus result in stockouts (inventory running out), dead stock (stock that does not turn over), or overstocking (having too much inventory), potentially leading to lost sales or increased carrying costs for businesses.

Limited data could also make it difficult for retailers to adjust inventory levels based on sales trends and market conditions.

Labor-Intensive Inventory Counts

Nobody is perfect, especially when counting inventory by hand. Periodic systems require physical inventory counts at regular intervals, and keeping perfect track of inventory numbers is challenging, especially if the inventory is extensive.

Manual counting is labor-intensive, time-intensive, and prone to human error. Therefore, Periodic systems are more susceptible to inaccuracies due to the lack of real-time tracking, and any mistakes along the way lead to discrepancies in financial reporting and inventory recordkeeping.

Limited Insight into Inventory Trends

Businesses best maintain their inventory by keeping up with inventory trends. After all, knowing what’s selling (and how quickly) and what isn’t prevents businesses from understocking, overstocking, or—worst of all—carrying deadstock.

Periodic inventory systems, being occasional, give businesses limited visibility into inventory trends, turnover rates, and sales patterns, restricting their ability to conduct detailed analyses and make data-driven inventory decisions.

A lack of timely insights leads to missed opportunities for inventory management optimization, so businesses leveraging periodic inventory might overlook or overcharge for those slower-moving items.

Difficulty in Managing Multiple Locations

Imagine conducting manual counts in multiple locations at the end of each month and then syncing your findings together, all while maintaining accuracy. Sounds complicated, right? 

One of the more prominent drawbacks of periodic inventory is the difficulty in scaling or coordinating across multiple locations or warehouses.

Inventory records can become inconsistent between locations, complicating overall inventory management for a multi-store business and drastically increasing the risk of inventory counting errors.

Set your business up for a successful scaling strategy before you’re ready to do so. It’s one less hurdle to overcome when the time comes.

The Upsides of Periodic Inventory Systems

For small businesses, seasonal operations, or pop-up retailers, periodic inventory systems can be a confident choice. They may not need all the advanced technology that perpetual inventory management systems offer, and periodic systems can effectively meet their needs.

Let’s take a look at the benefits of periodic inventory systems:

Cost Effectiveness

Periodic inventory systems are a financially savvy choice, especially for smaller businesses. They tend to be more cost-effective, at least upfront, than perpetual inventory systems. With less advanced technology required and no need for complex software or extensive hardware setups, businesses can avoid the substantial costs associated with setting up perpetual inventory management systems.

For one, periodic systems require less advanced technology than their perpetual counterparts. They do not require complex software or extensive hardware setups, meaning businesses can avoid the substantial costs of setting up perpetual inventory management systems. 

Periodic inventory systems are an attractive option for businesses seeking a more straightforward, more budget-friendly approach to inventory management. 

Simplicity

Periodic inventory systems are generally easier to set up and manage compared to perpetual systems. They do not require complex software or continuous integration with other systems, reducing the need for specialized training and IT support. This makes them more accessible for smaller businesses or less tech-savvy folks.

Ease of Recordkeeping

With a periodic inventory system, you can manage your records using a simple physical or computer-based spreadsheet. (That might be all you need for a no-frills business.)

The three basic parameters of periodic inventory are the current quantity of items in stock, the number of items purchased, and the number of items sold. That said, you can add as many features as you’d like to your inventory spreadsheet. 

You can even use our free, customizable inventory spreadsheet to create your own: 

No Disruption to Normal Operations

You decide when to conduct your periodic inventory counts and how often. Since you can schedule them at any time, periodic counts can be performed outside of regular business hours at a minimal cost to the business.

Also, because periodic systems place less demand on business processes and technology infrastructure, businesses can allocate their resources to other operational areas.

What is a Perpetual Inventory System?

Perpetual inventory management systems rely on point of sale (POS) and inventory management software to record real-time purchases and sales as they happen. These systems track inventory flows continuously and automatically.

Perpetual inventory methods are highly detailed and, aside from in cases of theft or damage, highly accurate. Retailers can access their current inventory information immediately, along with data about their stock. Perpetual systems also continuously update the cost of goods sold (COGS) after each sale.

Before the 1970s and 1980s, perpetual inventory systems were not widely used, and manual counting was the norm. As you can imagine, automated inventory tracking methods are far more efficient than periodic systems, and their widespread implementation revolutionized otherwise timely and error-prone inventory management processes.

The Downsides of Perpetual Inventory Systems

No inventory management system is perfect, and perpetual inventory is no exception to that rule. While they offer numerous advantages, like real-time tracking and accuracy, perpetual inventory systems are costly and technical.

Let’s look at the disadvantages of perpetual inventory:

High Upfront Costs

Implementing a perpetual inventory system, especially for businesses reliant on manual counting, might require a significant investment in software, hardware, and staff training. 

The cost of implementing such a system will depend on the size and complexity of a business. For example, larger companies with complex inventory requirements and multiple locations would face higher costs. Inventory management software, too, can range from a few hundred to several thousand dollars, and hardware such as barcode scanners or RFID systems can add up.

Complex Set-Up

Perpetual inventory systems can be complex to install and maintain. They typically need to integrate with other systems, like accounting software, POS systems, and supply chain management tools.

Sometimes, migrating data from one system to another can be daunting and time-consuming (and it’s super important to make sure your data is transferred accurately to preserve historical data).

Additionally, businesses starting at square one must select and install various hardware components and train employees and staff to use the system correctly, which takes time and money.

Dependence on Technology

There’s something to say about an inventory management system that transcends the unreliability of technology. (Power outage? Wifi troubles? No problem.) Unfortunately, perpetual inventory is not one of those systems. Perpetual inventory systems rely heavily on technology to function properly.

Many modern perpetual inventory systems use Wi-Fi to connect wireless devices like barcode scanners and tablets to the central inventory system. These systems rely on a stable network connection to perform as they should, especially if they’re cloud-based.

Moreover, your whole inventory management flow could suffer if any software or hardware tied to the perpetual system (such as barcode scanners, RFID readers, or servers) malfunction. 

Data Security Risks

Data security is a critical concern for perpetual inventory systems, given their reliance on continuous data updates and real-time access. Inadequate user authentication mechanisms like weak passwords or improper access controls can lead to unauthorized access. (Set up your two-factor authentication, perpetual system users!)

Cloud-based systems are vulnerable to cyber attacks like hacking or phishing, which is especially concerning for businesses working with high-stakes inventory or data to consider. 

Additionally, software bugs, hardware failures, or network issues could lead to data corruption, while inadequate or failed data backups can result in data loss.

Ongoing Maintenance and Training

Perpetual systems need continuous monitoring and troubleshooting to ensure things are running smoothly. Maintaining a perpetual inventory system requires regular software updates to fix bugs, add new features, and protect user security. Sometimes, business owners must plan carefully to avoid disruptions during software updates. 

Furthermore, business owners must regularly train their staff as the system evolves with updates and shiny new features, which, again, requires time and money. 

The Upsides of Perpetual Inventory Systems

Perpetual inventory systems are time-saving, technologically advanced, and automated inventory management systems. While they can be expensive to set up and maintain, their benefits to business owners are substantial.

Let’s take a look at the advantages of perpetual inventory systems:

Real-Time Inventory Tracking

Perhaps the most significant advantage of perpetual inventory management is real-time inventory tracking. Perpetual systems continuously update inventory levels in real-time as transactions occur, meaning business owners and staff members can log into their inventory management system at any time and see precisely how their inventory is performing. 

Think of the time businesses save by implementing automated inventory management systems rather than counting each of their products one at a time. That time saved can be allocated more strategically, such as to customer relationship management or product development.

Improved Accuracy

Humans make mistakes, especially when repeatedly counting hundreds of the same item for inventory management. Perpetual systems aren’t perfect either, but they significantly reduce the likelihood of human error in inventory management compared to manual counting.

Automated and continuous tracking gives businesses highly accurate inventory records, so you always know what you have on hand—and how much—with minimal effort.

Informed Decision-Making

Perpetual inventory systems provide real-time updates on inventory levels, sales, and stock movement so that decision-makers can access accurate, up-to-date information quickly. Access to real-time inventory data lets businesses respond promptly to changes in demand, supply chain issues, or market trends. 

Furthermore, retailers can leverage historical sales data and inventory trends to predict future demand more reliably, meaning they can reduce stockouts or overstock situations before they happen. 

Improved Financial Management

Perpetual inventory systems give retailers an accurate inventory valuation for financial reporting and analysis. More precise financial statements and better working capital management mean financial health and longevity for business owners.

What’s more, businesses can leverage perpetual inventory systems to track costs like inventory purchase costs, carrying costs, and obsolescence to control expenses and optimize pricing strategies proactively.

Scalability

As your business grows, your inventory management system should grow with you. Perpetual inventory systems can handle larger stock quantities effortlessly as companies grow and their inventory volume increases. Inventory tracking automation reduces the need for manual adjustments and ensures accurate stock levels, even with higher volumes.

Additionally, perpetual inventory systems integrate and centralize inventory data across multiple channels or locations. If you decide to open up a second storefront, online platform, or warehouse, you can still manage your inventory in one place without problems. The same can not be said for perpetual counting. 

Periodic vs. Perpetual Inventory Systems: Key Differences 

We know that the two primary approaches to inventory management are periodic and perpetual inventory systems. Each has its distinct characteristics and unique set of pros and cons. Let’s look at the differences between each system, head-to-head, to help you understand which might suit your business’s needs, scale, and budget constraints.

Here are five key differences between periodic and perpetual inventory systems: 

Data Update Frequency

• Periodic Inventory Systems: Retailers update inventory levels manually at set intervals (e.g., monthly or quarterly). Inventory data is only refreshed during physical counts, leading to gaps between updates.

• Perpetual Inventory Systems: Automated systems continuously update inventory records in real-time with every transaction. Retailers have a constant and accurate view of stock levels and movements at any time.

Inventory Tracking

• Periodic Inventory Systems: Retailers track inventory levels through periodic physical counts. Therefore, stock levels and costs are only assessed during these counts, which could delay a business’s ability to identify inventory discrepancies.

• Perpetual Inventory Systems: Businesses can track inventory in real-time, recording every sale, purchase, and adjustment as they occur. Immediate visibility into inventory levels and movements allows retailers to make informed inventory decisions in real time.

Cost & Complexity

• Periodic Inventory Systems: Periodic systems are generally more straightforward to set up and budget-friendly, requiring minimal technology and fewer ongoing expenses. However, they involve manual counting for inventory checks, which can be time- and labor-intensive.

• Perpetual Inventory Systems: Perpetual systems are more complex and potentially costly due to the need for sophisticated software and technology. Businesses must embrace continuous data management and regular system maintenance to keep their ship running smoothly.

Inventory Management

• Periodic Inventory Systems: The time between periodic inventory counts—and the time it takes to reconcile records and assess inventory levels—can lead to stockout issues or overstocking. Perpetual inventory systems also make tracking inventory trends difficult.

• Perpetual Inventory Systems: Real-time inventory updates allow for real-time inventory management. Businesses can make more accurate and timely adjustments to their inventory, preventing stockouts and overstocking.

Error Detection

• Periodic Inventory Systems: People must detect errors or discrepancies during physical counts—they’re not detected automatically. Therefore, manual counting and data analysis can result in delayed identification of inventory issues (and longer resolution times).

• Perpetual Inventory Systems: Perpetual inventory tracking software facilitates the immediate detection of inventory errors as they occur so businesses can quickly identify and correct any discrepancies in their stock. Automated data allows for more streamlined inventory management over time.

Which System Is Best For You?

Choosing between periodic and perpetual inventory systems depends on your business’s specific needs, size, and operational complexity. Each system offers its distinct advantages and disadvantages, and the best choice should align with your company’s budget and aspirations for growth.

Here are three considerations to help you determine which system suits your business: 

• Business Size and Complexity – For smaller businesses with consistent inventories, a periodic system could be what you need. However, larger companies with high inventory turnover should probably opt for the real-time accuracy of a perpetual system.

• Budget Constraints – If budget is your primary concern, you might avoid the lofty upfront costs of a perpetual system and opt for periodic. If you have the means, perpetual systems, provide long-term value through enhanced accuracy and efficiency. 

• Operational Requirements – How critical is real-time inventory data for your operation? Businesses requiring immediate insights and frequent adjustments, like manufacturers, might need a perpetual inventory system. However, small retail shoppers or seasonal businesses could do just fine with a periodic inventory system.

Periodic vs Perpetual Inventory System: Final Thoughts

We’ve said it before, and we’ll say it again: choosing between periodic and perpetual inventory systems hinges on your business’s size, complexity, and budget.

Periodic systems are simple and budget-friendly, great for smaller or less dynamic business operations. Perpetual systems, though pricier, offer real-time inventory accuracy and data tracking, ideal for businesses with high inventory turnover and complex needs.

If you’re curious about switching to a perpetual inventory management system, KORONA POS can get you there with precision, ease, and affordability. 

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