The Periodic Inventory System: The Good and Bad

Chances are that when you started out in business, you did not have a formal way of handling your accounting books, taking orders, tracking inventory or any other daily business task. However, as time passed by and the company continued to grow, you realized that you could no longer run your company in an efficient manner by just scribbling down notes on a sheet of paper or keeping valuable information in your head. If you want to continue growing your business, now is the time to take your business to the next level. If you want to have a successful company that continues to grow on a yearly basis, then you must set these things in place.

Not only must you incorporate an inventory system into your everyday business operations, but you must decide upon the type of inventory system. Will you use a perpetual or periodic inventory system? Of course there are major advantages and disadvantages for each system. The only difference between the two systems is the way that the inventory is updated. The perpetual inventory system updates information consistently. Whereas the periodic inventory system only updates information once a physical count has been done. However, for the purpose of this article, we are going to focus on the periodic inventory system.

Periodic inventory is only updated after a certain amount of time. Usually this is done based upon the company's physical inventory count. Companies usually count their inventory on a weekly, monthly, bi-annual or even yearly basis. This means that in terms of the books, the information is not regularly updated. Information is not updated when product is ordered, received or shipped. Although this is a definite con of using a periodic system, it is something that many first time business owners are willing to end.

With a periodic inventory system, you do not need an expensive inventory management software package in order to conduct business. This is because information is not updated when product is ordered, received or shipped. Yes, sales are being made, but your inventory system is not updated until the next physical inventory count. This could be a week, months or even a year before your records are updated to reflect the correct inventory amount.

If you have a small company, this type of inventory system might be perfectly fine. However, if your company is mature and has built up a list of buying customers, then you might not find this kind of system suitable for your needs. You will need a full fledge system that is capable of keeping track of your inventory in real time.

Quite naturally the largest benefit is that you will not have expensive upfront costs for an inventory management software system. Companies that have this type of inventory can use a simple excel spreadsheet to track their inventory. No, you will not have to consistently key information into the system, but this might become a hassle in the end.

However, there are also disadvantages to having this kind of inventory. The main one is that you will never have an accurate inventory count. It will be hard to track inventory when sales are made. The system will not be updated until the next formal physical inventory count. This can become very stressful if you have a large company that has a lot of business transactions.

All in all, both inventory systems are adequate. But, only you can decide which one is suitable for your company.

Source by Darren Folkes