Efficient inventory management is the backbone of any successful retail operation. It ensures products are available when customers are ready to buy them, prevents overstocking and reduces waste.
Enter the perpetual inventory system—an increasingly popular approach that offers real-time stock management and eliminates many of the challenges associated with traditional inventory methods like the periodic system.
In this blog, we’ll explore what perpetual inventory is, how it works, its benefits and how it compares to periodic inventory systems, helping you determine the best fit for your business.
- What is a perpetual inventory system?
- How does a perpetual inventory system work?
- 6 key benefits of perpetual inventory
- Perpetual vs. periodic inventory: Which is right for you?
City Bird saves hundreds of hours on inventory
“With reorder quantities and automated reorders, we've shaved weeks of work every year. It's just made it a much more seamless, efficient way to run that piece of the business.”
What is perpetual inventory?
A perpetual inventory system is a method of inventory management that continuously tracks inventory levels in real time. Unlike periodic inventory systems, which rely on recurring physical counts at specific intervals, perpetual systems provide continuous visibility into stock levels, helping businesses minimize errors, reduce shrinkage and make informed decisions.
This eliminates (or at least greatly reduces) the need for manual counts and provides a real-time view of stock levels, enabling better decision-making and operational efficiency—not to mention better customer service.
At its core, perpetual inventory leverages technology like point of sale (POS) systems, barcodes/barcode scanners and RFID tags/RFID scanners to record inventory changes as they happen.
Whenever a product is sold, returned or restocked, that information is recorded and fed into a continually adjusted central database—your POS—that automatically updates stock levels and any relevant reports.
Another key feature of perpetual inventory is automation. For example, in Lightspeed Retail POS, you can set reorder points (basically PAR levels) and restock levels (how much you need to order to bring stock levels back above PAR) for individual products. When stock levels reach the reorder point, it triggers two actions in the point of sale:
- The item is identified as ‘low stock’ and automatically added to your low stock report.
- (Optional) The POS will automatically populate a purchase order for this item, for however many units you set in the restock level field.
Here’s what that looks like in the POS backend:
With seamless integration into accounting, sales and purchasing systems, a perpetual inventory system streamlines operations and supports effective inventory management across multiple locations.
| Perpetual inventory systems | Periodic inventory systems |
| Track sales and stock counts in real time | Track sales and stock counts intermittently |
| Use technology to automate stock counts | Use frequent and recurring physical counts |
| More accurate/smaller margin for error | Bigger margin for error |
| Require less time and effort | Require frequent physical counts |
| COGS updated constantly | COGS updated periodically |
| Better for large or multi-location businesses, or businesses with large or complex inventory | Can do the job for small businesses with small, simple product catalogs |
How does a perpetual inventory system work?
Within a perpetual inventory system, your POS, barcodes and scanners work together to update stock levels in real time, and with minimal manipulation required from your staff. Information flows continuously and updates automatically, helping to ensure you’re never caught off guard by unexpected stock shortages or stuck with surpluses that aren’t moving.
Let’s take a closer look at some of the key features of a perpetual inventory system:
Real-time updates
With a perpetual inventory system, every transaction is recorded instantly. When a product SKU gets scanned at checkout, inventory levels are automatically updated to reduce the number of units held. When a product SKU is scanned as new stock is received, inventory levels are automatically updated to increase the number of units held. (You get the idea.) Returns, restocks and even inter-store transfers are also tracked in real time, reducing the chance of discrepancies.
But that’s not all. If you’re using a Retail POS with robust data and reporting features, it’s not just your inventory levels that will update automatically—so will your POS reports. From top sellers to low stock reports, to sell through rates and dusty inventory reports, powerful, real-time reporting empowers retailers with inventory insights that go far beyond what they have on hand.
Recently out of stock report in Lightspeed Retail.
Inventory database
Gone are the days of cabinets overflowing with god-knows-how-many-years of paper stock counts. Within a perpetual inventory system, all inventory management data is centralized in a single database, providing a live view of stock levels across all locations and channels. Instead of bulky, printed product catalogs, product details, supplier information, cost price, margins and more live inside your POS—fast, easy and accessible to you and your sales team.
Reduced human error
Human error is one of the most common causes of inventory discrepancies. By automating inventory tracking, the perpetual inventory method significantly reduces errors caused by misfiled paperwork, incorrect pricing and stock counts. This helps retailers reduce shrinkage, improve overall accuracy and avoid costly stockouts or overstock situations.
Integration with other systems
A key strength of a perpetual inventory system is its ability to integrate with other business tools, such as accounting software, purchasing platforms and sales systems. These integrations help keep financial records accurate, ensure purchasing decisions are informed by real-time inventory data, and enable more accurate demand forecasting—a must-have for seasonal industries.
Top 6 perpetual inventory benefits
A perpetual inventory system delivers a range of benefits that can transform how businesses manage their stock and operations. Here’s why it’s a game-changer:
1. Better accuracy
Perpetual systems aren’t subject to human error, so inventory counts are more accurate. This improved accuracy helps retailers spot inventory discrepancies and shrinkage early, so they can identify the source and act fast to protect their bottom line.
2. Real-time inventory visibility
With live updates, businesses can view stock levels at any time, from anywhere. This visibility empowers better decision-making, gives retailers the tools they need to provide fast, efficient customer service, and helps keep the right amount of inventory available at the right time.
A sobering reality? A recent study by IHL Group found that retailers are leaving nearly $1 trillion in sales on the table because of stockouts. And as much as 25% of Amazon’s revenue is fueled by retail out-of-stocks. If customers have to go to your competitor to get what they want, they may never come back.
3. Better demand forecasting
Real-time data helps retailers spot stockouts and low inventory faster, so they can act fast to keep products on the shelves. Because you never know when the next TikTok-fueled Stanley Cup Craze will clear out your entire season’s worth of inventory in the blink of an eye.
With historical data and past sales trends, they can more accurately predict how much they need to order to meet demand, reducing the risk of under- or over-ordering—and the consequences that come with them. This is particularly valuable during busy seasons or promotional periods.
4. Efficiency and time savings
Automating routine tasks like tracking, purchasing and reporting frees up your time, so you can focus on strategies to scale and grow your business. It also frees up your staff to focus on more high-value activities, like providing a more personalized customer experience and building strong relationships with your clientele. This efficiency not only saves you time, but also reduces labor costs.
5. Cost savings
By minimizing stock discrepancies, automating manual processes and optimizing order quantities, perpetual inventory systems help lower operational costs. The streamlined processes also lead to faster order fulfillment, happier customers and happier employees.
6. Scalability
As businesses expand, managing inventory becomes more complex. A perpetual inventory system, integrated with a premium point of sale, grows with your business, letting you handle larger inventories and multiple locations with ease. This scalability makes the perpetual inventory method ideal for retailers planning to expand their operations by opening more locations or sales channels.
Perpetual vs. periodic inventory: which is right for you?
As we’ve discussed, a perpetual inventory system simplifies and streamlines inventory tracking, improves accuracy, and helps retailers prevent stockouts—which lead to lost sales and frustrated customers—and excess stock, which ties up capital and can lead to waste and threaten your margins.
A perpetual system offers tremendous value to any retail business—but not every retail business needs one (yet). Some smaller companies, or businesses that deal in low volumes, may be able to get along just fine with a periodic system.
Large companies with a high volume of continuously rotating inventory—and businesses with multiple locations or channels—are ideal candidates for a perpetual inventory system. Even businesses that don’t meet these criteria but have ambitious growth plans should seriously consider implementing the perpetual inventory method.
Other factors to consider when deciding on a perpetual vs periodic inventory system include:
- Margins and budget: Can your company afford the upfront implementation and ongoing operational costs?
- Inventory size: Does your business manage high-volume or complex inventory?
- Vendor flexibility: Are your suppliers equipped to support different types of inventory management methods?
Key takeaways
A perpetual inventory system offers unparalleled accuracy, efficiency and real-time insights, making it an essential tool for today’s ambitious retailer.
By automating processes and integrating with other systems, the perpetual inventory method simplifies operations, reduces costs and empowers retailers to make data-backed decisions and more accurate forecasting.
If you’re still relying on physical stock counts and spreadsheet or even paper-based systems, now could be the time to reassess your current system, whether it’s still serving your needs, and explore what a modern solution like Lightspeed Retail POS could do for your business. Watch a demo to see what we can do.
FAQs
How does retail shrinkage impact my business?
Retail shrinkage, caused by factors like theft, breakage or human error, directly affects your profitability. Identifying and addressing shrinkage through accurate inventory tracking can save your retail business significant costs.
What is the difference between shoplifting and employee theft?
Shoplifting refers to theft by customers, while employee theft involves staff stealing goods, cash or private data. Both contribute to shrinkage and highlight the need for efficient inventory tracking and security systems.
How can technology help reduce retail shrinkage?
Technology like POS systems, barcodes and RFID scanners help improve inventory accuracy and detect discrepancies. Integrating these tools into a perpetual inventory system enables real-time tracking, gives you more visibility across your operations and minimizes shrinkage and other risks to your bottom line.
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