When every dollar and cent counts in the search for profitability, deploying an effective inventory management system can be a huge benefit.
That said, it's all too easy for businesses to become complacent with their inventory management, instead relying on intuition to guide their stock decisions. Given the importance of thoughtful inventory management in planning your business, this oversight can significantly impact your bottom line.
A periodic inventory system can be a valuable way to address this issue. In this article, we will explore its benefits, challenges, and strategies for implementation.
The periodic inventory system definition is simple: businesses calculate stock levels and the cost of goods sold (COGS) at set intervals, whether monthly, quarterly, or annually. This is in contrast to a perpetual stock counting system, where the balance is continually updated – a process that can be time-consuming and burdensome, especially for businesses that sell lower volumes.
The periodic inventory management system allows organizations to compare inventory sales at the beginning and end of a fixed period, using the results to make appropriate stocking and accounting decisions.
Unlike perpetual inventory systems, periodic inventory systems take a more hands-on approach. Here’s a breakdown of what the process entails.
Sellers have the flexibility to define their own inventory tracking intervals within a periodic system. The optimal choice hinges on several factors specific to your business, including:
At the end of the set period, employees will spend time taking a physical count of inventory. This encompasses not only readily available products on shelves or in warehouses but also those in transit or temporarily unavailable due to various reasons (e.g., being held for customer pickup, undergoing repairs, etc.).
Accuracy is key here – after all, the physical count forms the foundation for subsequent calculations and financial reporting. Employing standardized counting procedures, such as checklists or inventory management software, and double-checking counts can help minimize errors.
Once the physical count is complete, it's time to record the product quantities. This data is typically entered into a digital database or inventory management software, ensuring a centralized and organized repository for your inventory information.
This digital inventory record serves as the foundation for any subsequent calculations and analysis needed for tracking inventory flows, identifying trends, and making informed business decisions.
The periodic inventory system relies on calculating the Cost of Goods Sold (COGS). You can use this simple formula to calculate COGS:
COGS = (beginning inventory + purchases) - ending inventory
By subtracting the ending inventory value from the combined value of beginning inventory and purchases, you essentially calculate the cost of the goods that were sold during the period – essential information for financial reporting, profitability analysis, and tax purposes.
Learn more about COGS and why this calculation is important.
When debating between a periodic or perpetual inventory system, consider these factors:
Here are some of the key advantages that make periodic inventory systems appealing:
There are some potential drawbacks associated with periodic inventory systems to be aware of, such as:
Ready to get started with a periodic inventory system? Keep these tips in mind:
Beyond the basics, here are some additional strategies to maximize the benefits of a periodic inventory system:
Explore insights that can help you grow, drive sales, and optimize your operations management strategy. Visit the PayPal Resource Center for detailed guides designed for small to medium-sized businesses.
In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.
We use cookies to improve your experience on our site. May we use marketing cookies to show you personalized ads? Manage all cookies