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Perpetual inventory system and its benefits for a retail business

Perpetual inventory system and its benefits for a retail business
Aparajita Basu Roy
February 3, 2021
2 Minute
Perpetual inventory system and its benefits for a retail business

Keeping account of the goods and their sales has to be the raison d'etre of your organization, because without that you would not be able to make a living on a profitable business. Keeping stock of goods is the basic premise of any warehouse management system. Earlier retail businesses had no recourse to anything other than the Periodic Accounting System which means that the general ledger was rationalized depending on scrutinies that are held periodically in the space of a year. 

Currently, however, Perpetual Accounting (a.k.a Perpetual Inventory) is all the rage in the retail business scenario due to the advantages it offers. Perpetual inventory is when the changes are logged in the general ledger after each unit transaction transpires and consistently shows the most current and updated values of goods transacted.

Perpetual inventory notes every operation taking place in the shop-floors and on online stores in real time. Hence retailers can more easily and correctly validate that the balance of sales tallies with the physical goods that exist in the stores. No human intervention is required for the automatic process, so it’s both swifter and more accurate than the manual tracking methods manually used by minor retailers.

Here is how the Perpetual type of inventory system works - 

Step 1: Inventory is immediately updated by the Point of Sale software

As soon as an item is sold, the inventory handling system integrated to the POS (point-of-sale) software instantly assigns the debit to the main stockpile covering all sales routes. The process is made easier and prompt with Barcodes or RFID (radio-frequency identification) scanners.

 Step 2: Dependant records like cost of goods sold are updated immediately

Recalculation of the cost of goods sold (COGS) is automatically done as soon as a product is either received or sold.

Step 3: Completely flexible and regularly adjusted Reorder points 

Depending upon historical records, a perpetual inventory system will calculate and update reorder points, on its own, as and when sales grow or decline to maintain an ideal level of inventory constantly. 

 Step 4: Auto-generated Purchase orders for goods with a definite level of inventory

On reaching its reorder point for a product or SKU,  the inventory system auto-generates a fresh purchase order and forwards it to your vendor without any human interaction required.

 Step 5: Supplier delivered products are entered into the inventory system

Once the ordered products are delivered by the supplier to the warehouse, the warehouse management software (WMS) operator scans the items into the system, then they are available to retail customers on all or select sales avenues.

Advantages of Perpetual inventory

As you must have already perceived the Perpetual inventory system has many advantages. The following are some of the advantages of the perpetual inventory:

Documents facts in real-time

A perpetual system documents inventory movements whenever they occur. Hence you can always depend on the accuracy of your inventory counts. 

A detailed paper trail is available

A perpetual inventory system captures inventory transactions all through your supply chain. The recorded data will provide deeper insights into the impediments in your processes, so you find ways to optimize your logistics and inventory.

Brings down costs of managing inventory

Inventory holding expenditure and goods replenishments can be brought down to manageable levels with real-time data. Since manual processes are effectively automated, perpetual inventory also controls labor costs. 

 End-of-year inventory balance is easily calculated

Correct inventory balance is required for year-end accounting reports. Perpetual inventory system calculates this figure instantaneously as soon as the year ends as it keeps an accurate updated record of your inventory.

 Estimates demand more precisely

A synergetic inventory system estimates market demand easily and accurately. Documented inventory and sales records can help form the sound basis of projections for future sales patterns and make certain that you have just the amount of inventory required for different times of growth and dull periods. 

A perpetual inventory system seems to be the perfect option for rapidly flourishing ecommerce trades. With a high chance of inaccuracy and improper inventory control Periodic inventory system is slowly on its way out as a system of choice for retailers. Centralized inventory operation, enhanced stock levels, and more can be enjoyed by retailers who opt for Perpetual Accounting or Perpetual Inventory systems.