What Is Perpetual Inventory & How Does It Work

Perpetual inventory can be a highly effective means businesses can rely on to ensure that stock of important goods, materials, and parts is continually balanced cost-effectively. By relying on the perpetual method of accounting for inventory, organizations can often stave off the ill effects of overstocking, inventory depletion, and other potentially costly suboptimal conditions.

Perpetual inventory can be a means through which organizations can improve efficiency, operate more cost-effectively, ensure that they can meet customer or client demand, and much more.

But exactly what is a perpetual inventory system? What are the advantages of perpetual inventory, and how do organizations achieve this? If you’re curious, read on. We’ll be discussing what perpetual inventory is, why it can be so helpful to organizations of varying sizes and industries, and how organizations can achieve it. Let’s dive in

Perpetual Inventory Defined

So, what is the definition of perpetual inventory? In short, a perpetual inventory system is one in which goods are very carefully monitored, and their stock inventory is updated in real time. So, what exactly is the meaning of perpetual inventory in practical terms? With a perpetual inventory system, any time someone makes a sale, whether online, in a storefront, or anywhere else, it is recorded. Similarly, if stock is taken off the shelf, that is recorded too.

If stock is added, that is recorded in real-time, too. In monitoring stock in real-time in this method, businesses can take a much sharper approach to inventory replenishment. Learn more about efficient inventory management in our detailed guide on inventory turnover ratio.

The Importance of Perpetual Inventory

So, why is perpetual inventory so important? Surely, businesses could just keep a careful eye on inventory and replenish as needed? While this is true, and businesses have operated on more rudimentary systems for decades, perpetual inventory systems have some tangible potential benefits.

Chief among these is the fact that perpetual inventory can be highly cost-effective. Additionally, it can be highly efficient. Let’s explore why. Discover how to avoid common pitfalls in our article on inventory shrinkage.

Here are some key advantages of using a perpetual inventory system:

• Real-time updates on stock levels, ensuring accurate inventory data at all times.
• Minimization of stockouts and excess stock, leading to more balanced inventory and better cash flow.
• Enhanced decision-making based on current data, aiding in forecasting and inventory planning.
• Reduced administrative workload, as inventory counts are automated and less time-consuming.

Cost Effective

Perpetual inventory can be a cost-effective solution to careful inventory management. But why are storage costs reduced under a perpetual inventory system?

Other more rudimentary systems can lend themselves to issues such as overstocking, which at best can represent a steep upfront cost for goods and, at worst, can lead to product deterioration as unsold products sit on shelves or inadequate storage for other inventory — which can create a cascading effect of problems.

In contrast, through a perpetual inventory system, businesses can carefully ensure that they order stock that remains within optimal levels continuously. Read about strategies to optimize your stock levels in our comprehensive post on inventory levels.

Efficient

As we discussed, this can be a highly efficient system that lends itself less readily to losses than other, more rudimentary systems. Take the example of overstocking that we discussed. Overstocking is one of the inefficiencies that can be highly costly.

Another? Stock depletion.

This can lead to unhappy customers and cascading effects on the organization’s reputation. Find out how to manage these challenges in our insightful article on overstocking.

Effective

We’ve discussed how inaccurate inventory systems can be inefficient and costly but also ineffective. Take the examples of stock depletion or running out of storage space — both can lead to product shortages, which can create further problems for the organization.

Put simply, these issues can be a sign of an ineffective inventory system.

How Perpetual Inventory is Achieved

Perpetual inventory systems are a relatively new emergence within several industries. There’s a simple reason for that: perpetual inventory records generally necessitate the implementation of digital hardware and software.

So, what is one disadvantage of the perpetual inventory system? It necessitates a certain level of hardware and software. For example, to update inventory in real-time between a point of sale system (POS) and a warehouse 200 miles away, there’s practically no other way to do it than through software and digital communication systems.

As such, these systems rely on robust software solutions. By implementing the right integrations and tools into operations, an organization can take concrete steps to implement an effective perpetual inventory system.

Some of the hardware that these systems rely on include mobile devices and stationary computers that warehouse personnel can use to update stock levels in real-time, digital POS systems that storefronts can use to track and report inventory changes, barcode or RFID scanning devices that can enable warehouse or store personnel to scan inventory quickly, and computers from which management can oversee and manage the system.

The software these systems rely on must be fairly advanced — offering real-time updating capabilities, meaning that they must be integrated with network connections and can be cloud-deployed for accessibility. The extent to which a software system for perpetual inventory is effective can rely on its capabilities — such as integration with other systems, the number of actions it can track, and the speed at which it can update.

It's also important to note that inventory management software isn't one-size-fits-all. Different types of businesses may require unique features or integrations. For instance, a liquor store inventory management software might need age verification prompts or the ability to handle unique tax situations. Similarly, pet store inventory management software would benefit from features like pet food expiration date tracking and pet toy recall alerts.

Perpetual Inventory Best Practices

When implementing a perpetual inventory system, adhering to certain best practices can be helpful. Among these, some of the most important include using a strong software system, ensuring that the software is fully integrated with other systems, and consistency across the board.

Software

The software system underpinning your perpetual inventory system must be sufficiently capable of handling all the different moving parts of your organization's inventory system to be truly effective.

This can mean that you’ll need software that works across a wide range of hardware devices, can handle a large volume of data, and works well across networks.

Integration and Consistency

Ensuring your system is fully integrated with all other relevant systems is important. For example, suppose you can connect the system to a warehouse but not one of your storefronts.

In that case, your inventory tracking capabilities in your warehouse may be essentially moot. Similarly, inconsistent use of the system can render it less effective; for example, if stock is not being accurately counted into the system, the system cannot work properly.

The Bottom Line

Perpetual inventory counting can be a highly effective means of approaching inventory counting. Perpetual inventory systems are an excellent means through which organizations can strive to increase efficiency, reduce costs, and better ensure that they can meet customer demand.

However, it’s important to remember that by adhering to certain best practices, the effectiveness of such a system can be greatly improved. Implementing a successful perpetual inventory method formula can necessitate some advanced software, and it can be important to strive for consistency across various systems that make up your organization's inventory system.

Don't hesitate to reach out if you’re interested in learning more about inventory management or are ready to implement your own robust perpetual inventory system. We have the tools you need to implement your own highly efficient inventory management systems. Get started with a free demo today!