When is it time to track inventory?

Do you know what’s on your shelves? If your accountant asked you for an overall inventory count, could you give him totals that you’re sure of—without having to send your team out to count? Could you take on a big order with confidence, knowing that you can fulfill it, rather than hoping you have enough inventory on your shelves to deliver the job?  

If not, it’s time to take a look at your inventory practices.

Accurate inventory counts are essential for all kinds of business decisions – you’ll want to choose an inventory system that both makes sense for your business so you can confidently purchase stock (without worrying about overstocking or understocking), set prices in a fluctuating market, and know what capital you have invested in your inventory.    

There are two primary ways to track inventory: periodic inventory and perpetual inventory. 

While businesses typically count inventory manually in the beginning (periodic inventory), growing businesses with significant inventory usually find that they need a better method, something that keeps them up to date in real time and empowers them to make data-backed decisions. In short, they need to switch to perpetual inventory.  

In this article we'll discuss:

What is perpetual inventory? 

Perpetual inventory is a system where inventory is tracked in real time using software such as an ERP (Enterprise Resource Planning software). By connecting your inventory with your sales and purchasing processes, the system can track every time a specific item is added to or removed from your shelves.  

Let’s say you’re about to place an order for tires. Instead of having to go out to the shop and count how many tires you already have in stock, a perpetual inventory system will track how many tires were sold or used in manufacturing batches and subtract that from the total you’d had before, giving you an up-to-date number at a click.  

What are the advantages of perpetual inventory?

The major advantage of perpetual inventory is the ability to see exactly what you have on your shelves at any given time and know its value. Your inventory is one of your business’s greatest assets: too much on the shelves means money tied up that could be used better elsewhere; too little on the shelves means struggling to fulfill customer orders on time.  

Other advantages of a perpetual inventory system include:  

• The ability to make decisions about sales and allocation of resources based on accurate up-to-date data rather than opinions or guesses 

• Streamlined inventory process means employees can focus on doing work that grows the business, rather than spending days or weeks on inventory counts 

• Your leaders can see slowdowns starting and adjust inventory as needed  

• As you keep track of data over time, you’ll start to spot trends, seasonal changes, and other external effects on inventory 

• Your business can scale quickly, adding more or new products to inventory

What's the difference between perpetual and periodic inventory?

Both perpetual inventory and periodic inventory are ways of tracking your goods. Perpetual inventory happens on an ongoing basis, while periodic inventory happens at specific points during an accounting cycle. After a designated period (often yearly, but sometimes monthly or quarterly), employees take time to count each item in inventory and record the totals. Then, they compare to the previous count to see how many items were sold.  

Perpetual inventory  

• updated every time an item is sold  
• often uses barcodes on each item along with scanners and software to manage data  
• less room for human error 
• provides detailed information on everything coming and going 

 Periodic inventory  

• updated at regular time intervals
• requires employee time to count and record
• easier to in introduce human error in counting  
• information limited to what the counting teams can record  

Perpetual inventory promotes accuracy and convenience, but, like all systems, it’s still vulnerable to human error. For example, items that aren’t scanned but are removed from inventory can throw off counts, meaning that actual physical counting must be done occasionally to make sure that what’s in the system matches what’s on the shelves.  

The good news is that this physical counting can be done cyclically whenever the team has some down time, rather than shutting down operations to put everyone on counting duty (as often happens with periodic inventory). 

What's an example of perpetual inventory?

Imagine that a hardware store keeps a variety of goods on their shelves for sale, along with some additional inventory in the back. Each time an item is pulled from inventory and sold, their inventory system updates, giving the sales team an accurate count of what’s available for purchase.

When customers come into the store and ask for a particular item, the sales associates can check their inventory counts and direct the customer to the appropriate location on the floor or retrieve the item the customer needs from the stock in the back. Both employees and customers appreciate how easy it is to work with this system. 

Why would a business choose periodic inventory?

Perpetual inventory requires a significant investment in software and equipment, while periodic inventory relies on employees and tools you already have. Periodic inventory is quick and simple to implement compared to the longer timeframe to prepare and set up perpetual inventory.  

When the cost of perpetual counting is greater than the savings or benefits it offers, that’s when periodic inventory should be used. Don’t spend a dollar to save a nickel. 

What's an example of periodic inventory?

While the local hardware store tracks inventory for most of its goods, they also sell fasteners—nuts, bolts, screws, and washers—in bins.

In theory, the business owner could task his employees with counting and scanning each individual fastener into the inventory system and then re-scanning each individual fastener when it’s sold. In reality, that’s a frustrating and time-consuming task that no one would expect their staff to tackle! Keeping accurate count would be nearly impossible.

So in this situation, periodically counting the cases of fasteners on the shelf is more cost-efficient than perpetual inventory would be.

Do I need an ERP to do perpetual inventory?

To run perpetual inventory successfully, you need a business system that brings information together, and an ERP is designed with that capability. When inventory is recorded, the information from it needs to be stored somewhere where it can be documented, analyzed, and used in reporting.

If you have an ERP but haven’t yet made the switch to perpetual inventory and think you’re ready, your ERP provider can be your partner in helping you to set up and manage this part of your business.  

Your Key Takeaway

Perpetual inventory is a way of tracking goods that promotes accuracy and helps to minimize human error and inventory mismanagement. It provides real-time inventory counts necessary for accounting and makes it easier for leaders to make informed business decisions and scale growth to match demand.   

If you’re in search of a company to help you with a full ERP deployment or a partner for a perpetual inventory undertaking, Koble is ready to work with you.