Two basic types of inventory management techniques are common in business: periodic and perpetual. These techniques arise from the accounting method used to track inventory. Companies will then build different types of tasks or activities that use the basic theory of these systems for tracking and maintaining inventory. A periodic system is easier for goods that move frequently and are mostly homogeneous in nature. Perpetual inventory systems keep track of goods after each purchase, sale or adjustment. Taking constant inventory is not typically necessary for perpetual inventory management.
Companies should list their inventory policies in the manuals given to department managers who oversee inventory. Owners and executives will often select either a periodic or perpetual system and create procedures for the inventory system in place. For most companies, inventory is the second largest expense behind employees. The manual and internal controls for inventory management techniques are necessary to ensure that all employees follow set procedures during this business process. Periodic inventory systems typically require less instruction due to the work being spread out over several months or quarterly, allowing for fewer inventory management requirements.
For periodic inventory management techniques, companies will count and adjust inventory on a quarterly basis at a minimum. During the off months in the quarter, company accountants will simply make dollar adjustments in the accounting ledger. These adjustments take the beginning inventory balance, add monthly purchases, subtract monthly sales, and add or subtract adjustments to create a dollar figure for reporting. At the end of the quarter, the company will conduct a physical inventory count and reconcile the physical inventory to the number in the accounting ledger. These types of inventory management methods are often less work, but also are less reliable. Companies may also experience higher adjustments relating to spoiled, lost, stolen or damaged goods.
Perpetual inventory management techniques require more work, but are also more reliable. A computerized program will adjust the company’s main inventory account for any movement during each month. Rather than counting physical inventory on a quarterly basis, companies using perpetual inventory management techniques can relegate this burdensome task to an annual project. To maintain compliance with government inventory requirements, companies may need to conduct weekly cycle counts to prove they are not reporting inaccurate inventory amounts. Many local and state governments impose a tax on unsold inventory; this requires the company to have an accurate technique in place to avoid paying too much taxes.
