Periodic Inventory System: Which Business Should Use It?

Your best selling products start flying off the shelves, but before you know it, they’re out of stock. Customers leave disappointed, and sales take a hit. Meanwhile, other items sit untouched, take up space, and fill up warehouses until expired.

It’s frustrating, right? Balancing what to stock and when to reorder isn’t easy without a clear system in place. You might end up over-ordering slow-moving items or missing out on sales because popular products run out too soon.

Without a proper way to track inventory, these problems can quickly eat into your profits. Hence, many businesses use different kinds of systems—a periodic inventory system is also one among many—to manage stock without the stress of constant tracking.

Are you curious how this system can keep your business running smoothly? Let’s take a closer look by reading this article further!

What is a Periodic Inventory System?

A periodic inventory system is a way for businesses to track inventory by physically counting it at set times, like monthly, quarterly, or yearly.

Instead of continuously updating inventory records, companies check what they have at the start of a period, add new purchases, and subtract the ending inventory to calculate the cost of goods sold (COGS).

This method is simple and budget-friendly, so it is ideal for small businesses. Since inventory is only updated at specific intervals, companies don’t track stock levels in real time but instead rely on periodic counts to determine inventory value and expenses.

Larger or growing businesses usually need more precise, real-time inventory tracking, so they often use a perpetual inventory system, which is best managed with an ERP inventory module.

How Periodic Inventory System Works

The periodic inventory system updates stock levels at specific times, usually every month or year. Businesses perform physical counts during these periods, known as cycle counts, to check inventory.

After counting, they determine the cost of goods sold (COGS) by subtracting the remaining inventory from the sum of the starting inventory and new purchases. Here are the steps:

1. Record opening inventory at the start of the period.
2. Add purchases made during the period.
3. Conduct a physical count at the end.
4. Calculate ending inventory and COGS.

As this system doesn’t require software like inventory or accounting software, it’s commonly used by companies that sell small quantities of inventory, including art and auto dealers.

Calculations of Periodic Inventory System

To determine inventory value between physical counts, businesses start with the last recorded inventory and adjust for purchases and sales made during that period.

1. Start with the last recorded inventory (from the previous physical count).
2. Add purchases made between the two inventory counts.
3. Subtract the total sales during that period to estimate the remaining stock.
4. Compare this estimated value with the actual physical count, and any differences are recorded as cost of goods sold (COGS).

Since physical inventory counts take time and money, many businesses rely on the periodic inventory system to track stock at intervals.

While longer gaps between counts can lead to errors or missing items, updating inventory periodically helps prevent major losses and ensures products are available for sale.

Example of Periodic Systems

Let’s say you own Kedai Trendy, a small fashion boutique in Kuala Lumpur, specializing in trendy clothing and accessories. You use a periodic inventory system to track stock, meaning you don’t update inventory in real-time but instead count it at the end of each month.

January Inventory Details:

• At the start of January, your boutique has RM 50,000 worth of inventory, including dresses, handbags, and shoes.
• Throughout the month, you purchase RM 20,000 worth of new stock, such as Chinese New Year-themed outfits and accessories to keep up with seasonal demand.
• Since you don’t track sales daily, you wait until the end of January to conduct a physical count.

After counting, you find that your remaining inventory is worth RM 15,000, meaning the rest was sold throughout the month.

This means you sold RM 55,000 worth of clothing and accessories in January.

Business Impact:

• What changed? The boutique stocked up on festive items for Chinese New Year, which boosted sales.
• What’s the downside? Since inventory wasn’t tracked in real-time, you may only realize certain bestsellers are out of stock once customers ask for them.
• What’s the risk? You might also overstock less popular items, like handbags, while running out of high-demand products, like red cheongsams.

While the periodic inventory system is simple, it doesn’t provide instant stock updates, which could impact customer satisfaction and future purchasing decisions. And if the businesses need to predict the future sale, there’s a lack of demand forecasting to determine how they should stock up.

When is the Periodic Inventory System Used?

A small business with few products might choose a periodic inventory system if they don’t plan to expand quickly. Some businesses even combine periodic and perpetual systems depending on their needs.

Since a periodic system doesn’t require extra equipment or complex inventory software, it’s cheaper and easier to use. Employees can be quickly trained to count inventory, making it ideal for businesses with high staff turnover, like seasonal workers.

A periodic system works well if you closely manage your supply chain and sell a few products. However, if you need to track missing stock or spot errors in inventory, a perpetual system is better, especially as your business grows and becomes harder to manage manually.

Benefits of Periodic Inventory System

One of the biggest advantages of the periodic inventory system is that it’s easy to use. Instead of tracking stock in real-time, businesses count inventory at set times, avoiding the need for expensive software or complex setups.

Here are the reasons why it works well for small businesses:

• Saves Money: No need for costly inventory software or system maintenance.
• Simple Setup: Small businesses can start using it quickly with minimal training.
• Flexible Counting: Choose when to count stock, like during slow seasons.
• Less Data to Manage: No constant updates, so businesses can focus on sales and growth.

For businesses with low stock turnover, advantages of periodic inventory system are abundant without the extra work. Owners can spend more time on customers and business growth, knowing their stock is checked when needed.

Challenges of the Periodic Inventory 

One major downside of a periodic inventory system is that it provides limited information, usually just a basic product count. Since stock updates happen at specific intervals rather than in real-time, businesses can’t track items as they move.

This makes it hard to pinpoint issues like missing stock or unexpected shortages. And then, this system also has other drawbacks, such as:

• Limited Updates: Inventory is only checked at set intervals, meaning information isn’t always current.
• Lack of Real-Time Data: Unlike large businesses using ERP systems, periodic inventory doesn’t track sales and shipments instantly.
• Stock Shortages Go Unnoticed: Businesses might not realize a product is out of stock until a customer asks for it.
• Risk of Overselling: Online sales may occur even if the product is no longer available, leading to backorders and delays.
• Stress on Staff: Employees must manually check stock more often, increasing workload and potential errors.
• No Automatic Restocking: Advanced businesses use automatic reordering to prevent stockouts, which periodic systems don’t support.
• Limited Cost Tracking: Without real-time data, businesses can’t accurately track cost per item sold, which affects profit margins.
• Not Scalable for Growth: Larger businesses need detailed and frequent inventory updates to stay competitive—periodic inventory doesn’t provide that.
• Delayed Insights: Businesses only get a clear inventory picture at the end of each period, making it harder to make informed decisions daily.

Periodic vs. Perpetual Inventory Systems

Both periodic and perpetual inventory systems help track stock, but they work differently. While perpetual inventory is more advanced since it updates transactions instantly, periodic inventory is simpler and better suited for businesses with uncertain inventory needs.

Why Perpetual Inventory Is More Detailed:

• Tracks every transaction in real-time, so inventory records are more accurate.
• Updates the general ledger immediately after each sale or purchase.
• Keeps the cost of goods sold (COGS) current without waiting for a stock count.

Why Periodic Inventory Works for Simpler Needs:

• No need for constant updates, as stock is counted only at set intervals.
• Works without computer systems, making it useful for businesses with uncertain or changing stock.
• Requires manual data entry after physical counts, which takes more time.

How Accounts Are Updated Differently:

• Perpetual System: Purchases go into a merchandise or raw materials account, and stock levels are instantly adjusted.
• Periodic System: Purchases are recorded in a purchase asset account, meaning individual unit tracking isn’t available until after a stock count.

As businesses grow, they need to organize products, assign SKUs, and define relationships between purchases and sales, which is a step that’s crucial for making a perpetual system work efficiently.

Best Practices of Periodic Inventory System

To manage a periodic inventory system effectively, set a consistent counting schedule to keep track of stock accurately. Depending on your business needs, you can count inventory monthly or quarterly to stay updated on stock levels.

It’s also important to record purchases and sales carefully. Keeping detailed and timely records helps prevent errors and makes it easier to calculate inventory and cost of goods sold (COGS) when needed.

Manage Periodic Inventory with HashMicro Inventory Software

Tracking inventory doesn’t have to be a hassle. HashMicro’s Inventory Software helps businesses handle periodic inventory efficiently while keeping costs low. With features designed to simplify stock management, you can maintain accurate inventory records without the need for real-time tracking.

Moreover, you can always try the free demo (without having to enter your credit/debit card information) to see whether this system is to your liking or not.

Here are the key features that keep inventory on track and tidied up:

• Stock Take & Adjustments: Conduct physical stock counts at set intervals and update records effortlessly.
• Smart Stock Forecasting: Predict future stock needs based on sales trends to avoid shortages.
• Detailed Reports & COGS Tracking: Get clear insights into stock levels and cost of goods sold (COGS) for better planning.
• Multi-Location inventory management software: Keep track of stock across different stores or warehouses, ensuring nothing goes missing.

With HashMicro’s Inventory Software, you can stay on top of your stock while enjoying the flexibility of a periodic inventory system—no complicated real-time tracking required!

Conclusion

A periodic inventory system helps businesses track stock by conducting physical counts at set intervals, like monthly or yearly. While it’s cost-effective and simple, it lacks real-time updates, so growing businesses with fluctuating demands might have a harder time in the long run.

With HashMicro’s Inventory Software, you can schedule stock counts, track purchases, and calculate COGS with ease. No more manual spreadsheets or last-minute surprises, as our system helps you update records accurately and prevent overstocking or running out of popular items.

Instead of spending hours fixing inventory errors, let HashMicro do the work for you. Gain full control over your stock, cut unnecessary costs, and keep customers happy; all with a simple, powerful system designed to grow with your business.

So, what are you waiting for? Try the free demo now and optimize your inventory better!

Frequently Asked Questions on Periodic Inventory System

• What types of businesses typically use a periodic inventory system?

  Small businesses with limited inventory, such as art galleries or car dealerships, often use periodic inventory systems due to their simplicity and lower cost.

• How does a periodic inventory system handle inventory shrinkage?

  Periodic systems may not immediately detect inventory losses from theft, damage, or errors, as these are only identified during physical counts at the end of each period.

• Can a periodic inventory system be used alongside a perpetual inventory system?

  Yes, some businesses may combine both systems, using a perpetual system for high-value items requiring constant tracking and a periodic system for lower-value items.

• What accounting methods are compatible with periodic inventory systems?

  Businesses using periodic inventory systems can apply various accounting methods, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or weighted average cost, to value their inventory.