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What is perpetual inventory and why does it matter?

To ensure an accurate inventory balance, don't overlook the practice of perpetual inventory. Here's what you need to know.

Perpetual inventory refers to the practice of keeping a running count of inventory balances. All computerized (and most manual) inventory management systems use the perpetual inventory approach.

Perpetual inventory starts with a balance on hand and updates that balance every time inventory movement is reported through a transaction. Goods received add to the balance on hand, while uses or "issues" reduce the balance.

Because perpetual inventory is transaction-driven, the accuracy of the balance record depends on the accuracy and timeliness of the transaction handling process. Manual transaction reporting invariably involves delays and offers significant opportunities for miscounts, incorrect item numbers, lost transactions and so on. Reporting also burdens workers who would rather be producing product than writing the inventory transaction report. Many companies use automation, especially bar-code scanning, to improve transaction reporting timeliness and accuracy. Other technologies like radio frequency ID (RFID), touchscreen displays and voice recognition also are used to automate inventory transaction reporting.

No matter how well the perpetual inventory system is operating, it is usual practice to measure accuracy and validate balances with a physical count. Many companies undertake a total wall-to-wall physical count annually, often at the insistence of accountants or auditors. But taking a physical count annually is costly, disruptive and arguably does not improve accuracy. A more effective approach is to take a physical count regularly. This not only validates accuracy but also helps identify flaws in the transaction system, thereby increasing the accuracy and integrity of the perpetual inventory system.

The alternative to keeping a running total is to conduct a periodic count to adjust the balance records with no updating between counts. The problem with this method is that if counts are conducted weekly on, say, Friday afternoon, users have no idea what inventory is on hand on Monday, Tuesday or at any time other than right after the count on Friday afternoon. It's hard to imagine how a company could operate effectively without a perpetual inventory balance, yet some do.

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