Chapter 5

Inventory management systems

You know inventory is vital to a healthy business. So let’s look at some systems for efficient inventory management.

A person outside of a warehouse full of inventory

Periodic inventory system

A periodic inventory system is the most basic and frequently used by smaller businesses. It involves physically counting your inventory – via a good old inventory count – at set periods. You reconcile those numbers against the purchase and sales records in your books.

You can read more about inventory counting in chapter 4 on inventory accounting.

Perpetual inventory system

Under a perpetual inventory system, you update records as each item of inventory is purchased or sold.

This is generally done by software. You place your orders through the system, so it knows what you’ve ordered. And you link it to your point-of-sale (or invoicing) systems, so it knows what you’ve sold.

It does all the math of AVCO, FIFO, or LIFO accounting in real time, so you’ll see how much money you’re making on each sale.

You will still need to do occasional inventory counts to confirm the system is working properly – and to complete annual tax returns.

Which is the best inventory management system for you?

Periodic inventory management may be enough for businesses that only sell a few products. It will show you broadly how much inventory costs your business and will allow you to complete annual accounts.

But if your product range or sales volumes grow, or you have a number of locations, periodic inventory management will begin to slow you down. Plus you will find it difficult to do the more precise FIFO or LIFO accounting.

A perpetual inventory management system will give you a real-time view of your margin while giving you back a lot of the time normally spent on stocktakes.

Periodic inventory management: pros and cons

Pros and cons of periodic inventory management

Perpetual inventory management: pros and cons

Pros and cons of perpetual inventory management

Starting with periodic, and switching to perpetual as you grow, is a smart option. To make it easier to do, set up your other business systems to accommodate a switch at some point in the future. Get a point-of-sale (or invoicing) system that can integrate with inventory apps. Do the same when you choose accounting software.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

Guide to inventory

Inventory management is more than just knowing what’s been sold and what you’ve ordered. Find out what else is involved.

Download our complete guide to inventory

Learn the strategies and techniques behind successful inventory management. Fill out the form to receive our inventory guide as a PDF.

Start using Xero for free

Access all Xero features for 30 days, then decide which plan best suits your business.

  • Included
    Safe and secure
  • Included
    Cancel any time
  • Included
    24/7 online support