Manufacturers and merchandisers handle inventory through the operation of their business. Manufacturers manage the inventory of raw material, work in process and finished goods. Merchandisers manage merchandise inventory. Both types of business must choose the inventory method used to manage the inventory quantities and cost basis. Management must compare the advantages and disadvantages of the both the perpetual inventory and the periodic inventory systems.
Perpetual Inventory Advantages
Perpetual inventory systems maintain a real-time inventory quantity balance for each inventory item. Corporate personnel, warehouse personnel and salespeople access the inventory system to see how many units are available for customer purchases or to determine if additional inventory should be ordered. Perpetual inventory systems include warehouse information identifying where items are located, facilitating the shipping process. A perpetual inventory system also facilitates the use of online sales by adjusting the inventory balance whenever another item is sold.
Perpetual Inventory Disadvantages
Perpetual inventory systems require a large financial investment to implement. The company must purchase computer software and scanning equipment. Every inventory item must be scanned and entered into inventory at the implementation phase. The company may have to pay overtime to employees and hire temporary employees to enter every item into the system. Employees need to be trained to use the scanning equipment every time an item is shipped or received in the warehouse.
Periodic Inventory Advantages
Periodic inventory systems require little additional investment. Employees manually count selected inventory items throughout the year, called cycle counting. Some items, which endure continuous activity, are counted more often than others. Once a year, the employees conduct a complete physical inventory. Small businesses with little additional funds benefit from using a periodic inventory system because of the minimal investment. Owners who work hands on in the business often estimate their balances based on the sales they've made and the purchases they've received. Because of their personal involvement with the business and their in-depth knowledge, they generally estimate accurately.
Periodic Inventory Disadvantages
Business owners who employ many people to handle customer sales or inventory receiving lose their personal involvement with the business and estimate their balances less accurately. A periodic inventory system will not provide an accurate inventory count until the physical count takes place. Salespeople must guess whether or not items are in stock and available for shipment. Website sales lack the ability to clearly identify if a product is in stock and when it will be shipped.