What is an Inventory Management System? A Guide

In most cases, periodic inventory counts are conducted a few times per year or even at the end of every month. The first in, first out (FIFO) method assumes that the oldest units are sold first, while the last in, first out (LIFO) method records the newest units as those sold first. Businesses can simplify the inventory costing process by using a weighted average cost, or the total inventory cost divided by the number of units in inventory. On the other hand, detractors don’t necessarily note that reported stockouts without corresponding sales can signal theft or loss and trigger a physical inventory check faster than with a periodic system. Educate staff about the benefits of accuracy in maintaining real-time inventory updates.

• If your business deals with high-value items or products that sell quickly, using a perpetual inventory system allows you to maintain accurate and real-time stock levels.
• Considering these pros and cons will help you determine whether implementing a perpetual inventory system is right for your business operations.
• The ability to track each item’s movement from receipt to sale improves accountability and discourages internal and external theft.
• This helps retailers reduce shrinkage, improve overall accuracy and avoid costly stockouts or overstock situations.

Key Manufacturing Industry Trends to Watch in 2025

With an expansive portfolio of long-format blogs, newsletters, whitepapers, and case studies, Supriya is dedicated to staying in touch with emerging SaaS trends to produce relevant and reliable content. This perpetual inventory method definition formula calculates the average number of days it takes for a company to sell its inventory.

After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. FIFO means that the goods you purchased or manufactured first are the ones you sell first. EOQ is used to determine the optimal order quantity that minimizes inventory holding costs and ordering costs.

Rather than asking employees to perform constant record-keeping, firms had more productive tasks for their workers. “The fulfillment network we switched to appeared to have a solution to this by automatically calculating that figure and syncing directly with the product page. The last in, first out (LIFO) method means you sell your newest purchased or manufactured goods first.

It helps businesses maintain consistency in available stock and avoid overselling products. Companies involved in distributing goods to retailers or other businesses benefit from Perpetual Inventory Systems to track inventory as it moves through their warehouses and distribution centers. This allows them to manage inventory levels effectively and coordinate deliveries accurately.

The use of a perpetual inventory system makes it particularly easy for a company to use the economic order quantity (EOQ) method to purchase inventory. EOQ is a formula that managers use to decide when to purchase inventory based on the cost to hold inventory as well as the firm’s cost to order inventory. The differences between perpetual and periodic inventory systems go beyond how the two systems function, although that is the main point of distinction. Challenge – Initial setup and operational costs can be high, especially for small businesses. Solution – Start with scalable systems that align with your business size and growth trajectory.

A perpetual inventory system can utilize the FIFO (First-In, First-Out) or LIFO (Last-In, First-Out) method. The selection of FIFO or LIFO will depend on the particular needs and desires of the company. FIFO is more commonly used as it reflects a natural flow of goods in most industries where older items are sold before newer ones. Ultimately, businesses should carefully assess their specific needs and challenges to determine whether a perpetual inventory system is the right choice. Considering these pros and cons will help you determine whether implementing a perpetual inventory system is right for your business operations. Security measures within a perpetual inventory system include access controls, encryption of sensitive information, and regular data backups.

Perpetual systems aren’t subject to human error, so inventory counts are more accurate. This improved accuracy helps retailers spot inventory discrepancies and shrinkage early, so they can identify the source and act fast to protect their bottom line. Perpetual inventory is an accounting method that records the sale or purchase of inventory through a computerized point-of-sale (POS) system.

Inventory Management Solutions: Handle Inventory Operations with the Right Tool

They needed an inventory management system that could manage inventory efficiently and identify process bottlenecks. Blue Bon was looking for ways to overcome the challenges in manual inventory management and streamline the inventory management process. A growing company with an increasingly complex supply chain can benefit from adopting a perpetual inventory system. The real-time inventory data provided by this method facilitates better decision-making when it comes to purchasing, production planning, and overall supply chain management.

An inventory management system is a software solution designed to track, manage, and optimize inventory levels. It helps businesses automate stock control, prevent shortages and overstocking, streamline order fulfillment, and improve overall operational efficiency. Should you opt to use this type of inventory management, you should understand the main benefits and pitfalls before switching your operations. If you want to improve your logistics operations, consider implementing a perpetual inventory system. For businesses in which transactions such as purchasing, selling, and moving inventory happen every second, perpetual inventory systems are invaluable in helping to keep track of what is going on at all times.

• The balance in inventory account at the end of an accounting period shows the cost of inventory in hand.
• They can also identify slow-moving items or trends in consumer preferences quickly, allowing for timely adjustments in purchasing or marketing strategies.
• With mobile apps and cloud-based platforms, employees can perform tasks like stock counting, tracking, and updating inventory data directly from their smartphones or tablets.
• Barcodes are affixed to each product or packaging, and RFID tags use radio waves to transmit information wirelessly.
• The average cost method is your total inventory cost divided by the number of goods in your inventory.

Periodic Vs. Perpetual Inventory System: Key Differences

Examples of perpetual inventory systems showcase how various industries leverage continuous tracking to streamline operations and enhance efficiency. While the initial investment in perpetual inventory software and hardware may seem significant, the long-term cost savings can outweigh these expenses. By reducing inventory carrying costs, minimizing stockouts, optimizing order quantities, and improving operational efficiency, businesses can achieve significant cost savings over time. Additionally, the ability to negotiate better terms with suppliers and reduce emergency expedited shipments further contributes to cost savings. Optimizing inventory management processes is essential for businesses to operate efficiently, reduce costs, and improve customer satisfaction. This results in a constantly updated and accurate representation of the available stock levels at any given moment.

Barcode or RFID Technology

The Perpetual Inventory System also calculates the Cost of Goods Sold (COGS) continuously, allowing for accurate financial reporting. Perpetual inventory system is a technique of maintaining inventory records that provides a running balance of cost of goods available for sale and cost of goods sold for a period. Under this system, no purchases account is maintained because inventory account is directly debited with each purchase of merchandise. Under perpetual inventory system, the expenses that are incurred to obtain merchandise inventory are added to the cost of merchandise available for sale.

Like many things in business, perpetual inventory has its advantages and disadvantages. ABC Analysis categorizes inventory items based on their value and significance in the overall inventory. It typically involves categorizing items as A (high-value, low-quantity), B (moderate-value, moderate-quantity), and C (low-value, high-quantity) items. This formula calculates the percentage of revenue that exceeds the cost of goods sold and measures the profitability of sales.

Solution – Develop contingency plans, such as manual tracking procedures, and invest in cybersecurity measures to protect sensitive data. Ensure reliable internet connectivity to support system updates and data synchronization. NetSuite ERP is a robust enterprise-level inventory management system with advanced tracking, reporting, and automation capabilities. This method tends to provide more accurate results when dealing with perishable goods or products with short shelf lives since they need to be sold before their expiration dates. As the system stores real-time data on inventory movements, it may also contain sensitive information about products, suppliers, and customers.

Understanding Perpetual Inventory Systems

By knowing the exact inventory levels at all times, businesses can optimize their inventory carrying costs. Carrying excess stock ties up working capital and may lead to increased warehousing and insurance costs. On the other hand, carrying too little stock can result in missed sales opportunities and increased rush-order expenses. A Perpetual Inventory System helps strike the right balance, minimizing costs while maintaining adequate stock levels. The Perpetual Inventory System is an inventory management method that operates on real-time and continuous tracking of inventory transactions. It begins with the setup of an inventory management system, where each inventory item is assigned a unique identifier, like a barcode or RFID tag, for accurate data capture.

To learn more on how ShipBob can support your ecommerce business, click the button below to request information. Whenever a product is sold, the inventory management system attached to the POS (point-of-sale) system immediately applies the debit to the main inventory across all sales channels. Barcodes or RFID (radio-frequency identification) scanners make this process quick and easy. By leveraging modern technology such as barcode scanners and inventory management software, companies can efficiently monitor product movement throughout the supply chain, from procurement to sales.