What Is a Perpetual Inventory System?
Every small business owner knows that keeping up with inventory is a crucial aspect of company accounting, which is why many businesses have started using a perpetual inventory system. A perpetual inventory system is a method of inventory management that utilizes technology to record transactions of received or sold stock at the very moment those transactions occur. Having the means to track inventory in real time allows a small business owner to know exactly what items are on hand at any given moment.
Coupled with the use of insightful accounting software offered by Skynova, your small business can quickly implement a perpetual inventory system into its inventory methods. This article will review key details about perpetual inventory systems and explain why they tend to perform better than other systems, including a periodic inventory system.
Example of a Perpetual Inventory System
A perpetual inventory system monitors every item that goes in or out of a business's holding of goods. This type of interactive database records the cost of goods sold (COGS) as each unit is paid for by a customer and factors in any supply deliveries and their associated costs.
For example, let's say you own a small grocery store that utilizes a perpetual inventory system. Each time a product is scanned and purchased, the system updates the inventory levels in its database. This means business owners can view the actual, not estimated, number of a given item on hand at any given time. They can also keep active tabs on discounts, returns, and other specialized item interactions that can affect inventory.
What Is the Difference Between a Perpetual and Periodic Inventory System?
Periodic inventory systems require physical counts of stock at designated checkpoints in time. This time frame could be weekly, monthly, or even quarterly. Having to go through inventory by hand can be time-consuming if you're running a business dealing in high volumes of inventory.
However, for small businesses that don't typically handle large amounts of stock, a periodic count may be all that's necessary since daily changes in inventory are less frequent. For example, if you own a car dealership, it's unlikely you'll sell enormous quantities of vehicles on any given day. You may prefer a periodic system if this is the case.
How Does the Perpetual Inventory System Work?
Utilizing a network of information directly connected to the particulars of your business's products, a perpetual inventory system logs the movement of stock items. It also keeps a running tally of expense recalculations. These are not difficult or complex systems to understand, and they can revolutionize inventory management with little effort on the part of the business owner.
With customizable accounting software like Skynova in place for items like recurring invoices, implementing a user-friendly perpetual inventory system is a breeze. The following sections represent the common workings of a perpetual inventory system.
The Point-of-Sale System Updates Inventory Levels
If you're using a point-of-sale (POS) system, you're primed to get the most out of your perpetual inventory application. Essentially, each time an item is sold and run through your POS via a barcode or radio-frequency identification (RFID) scanner, that information goes directly into the perpetual inventory system. Debits appear across all sales platforms immediately and your inventory account is updated constantly.
The Cost of Goods Sold (COGs) Is Recalculated
Each time the POS sends news of a debit to the perpetual inventory system, your cost of goods sold (COGS) is updated simultaneously. Gone are the days when it was necessary to key those numbers yourself. The perpetual inventory system eliminates the possibility of human error when tabulating an inventory balance — and the need for daily checks on stock availability.
This means that if you're running a small stationery boutique, you don't have to keep a personal tally of how many pens you sold this week. The perpetual inventory system does the work for you and helps you stay on top of your revenue.
Reorder Points Are Updated
As reorder points (ROPs) represent the bare minimum quantity of a given item that your business should have in available inventory, accuracy on this part of inventory accounting is crucial. A perpetual inventory system will update your ROPs with every sale and delivery.
This means that you're looking at real-time stock numbers and can more easily maintain optimal levels of popular items without having to do a physical inventory count. When used in tandem with a purchase order template by Skynova, your inventory supply-and-demand process can be streamlined.
New Products Are Added to the Inventory Management System
Any time you or your staff scan new inventory into your warehouse or inventory room, this information is taken in by the perpetual inventory system. You can program the inventory management system to make that new product visible across all sales channels or only on select inventory records.
For example, if you run a snack vending machine company, you may want your more high-volume drivers to have access to new inventory first, as they're more likely to be in immediate need of restocks. Tracking inventory as it arrives helps prevent stockouts and lets you know upfront what beginning inventory you'll need to meet next month's demands.
What Accounts Are Used in a Perpetual Inventory System?
A perpetual inventory system makes use of several existing accounting methods within your business. Those accounting records are:
Cost of Goods Available for Sale
The cost of inventory in stock at the start of a given accounting period is known as the cost of goods available for sale. In a traditional accounting system, this figure typically excludes selling or distribution costs and costs associated with ending inventory at the end of the established period.
A perpetual inventory system takes this figure into account when reflecting real-time numbers on revenue and ROPs. For example, if you're the head of a small residential painting company, you need accurate inventory information on the cost of paints in stock and ready for customer purchase. Without this information, it's easy to overestimate the availability of an inventory item, promise something to a customer that's not currently available, or miscalculate what you need to spend this month to be ready for accounts you've secured.
Cost of Goods Sold
The cost of goods sold (COGS) reflects everything from the price of the materials to the labor and delivery associated with getting them to the customer. A perpetual inventory system tracks this number and updates it at each checkpoint of delivery. This means that a small carpentry business doesn't have to keep separate logs of delivery costs for different materials, such as lumber or hardware, as it's automatically recorded into the inventory management software when ordered.
One area where accounting mishaps can easily occur is expenses, which is a blanket category covering any and all costs associated with getting or keeping your inventory. A perpetual inventory system bypasses problems here by noting costs as they're incurred and centralizing those numbers in a single place. Ultimately, your company saves money by utilizing a perpetual inventory system, as it allows you to clearly see where costs can be cut or optimized.
Accounts Payable and Accounts Receivable
Any business owner recognizes the headache that can arise from keeping up with who owes the company money and to whom the company owes money. A perpetual inventory system heads off these headaches by logging payments instantly and tracking order confirmations.
Your accounts payable and accounts receivable system is then available to view at an itemized level. Used in conjunction with Skynova's accounting software, your perpetual inventory system can make keeping up with your company's incoming and outgoing money much simpler.
Let Skynova Help You Manage Your Small Business Accounting
Maintaining healthy inventory levels is a delicate balance that no small business owner should do alone. Skynova offers accounting software that can partner easily with any perpetual inventory system to bring your finances and stock availability into greater alignment.
Keeping up with everything from work orders to credit notes has never been easier. Skynova's software products and templates can also streamline other aspects of your business. Look to Skynova to simplify the process of accounting for your small business.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant for specific advice regarding inventory best practices.