Perpetual Inventory System: What It Is & How It Works For Ecommerce Brands
Easy A in Ecommerce Efficiency: Automate repetitive tasks to save time and reduce errors.
Tech Upgrade Wins: Invest in advanced systems for smoother operation and happier customers.
Cut the Churn Clutter: Use reliable tools to minimize setbacks and distractions.
Smart Choices Equal Stress-Free Business: Select solutions that streamline processes, ensuring a less stressful work environment.
Effortless Success Strategy: Adopting right systems can lead to fewer issues and more productivity.
Don’t let this pop quiz intimidate you—it’s an easy one:
Which of these systems is more likely to save your ecommerce business hours of labor and splitting headaches?
Option 1: You and your team go to the warehouse every quarter, together with your barcode scanners and printed inventory sheets. You assign a warehouse section to each employee, where they scan each barcode and compare it to the printed list.
OR
Option 2: You rely on an advanced inventory management tool, which integrates with your barcode scanning system and ecommerce platform. This set-up tracks all sorts of inventory movement, so all you have to do to find out the latest stock levels is to check the system.
If you picked option 2 (aka perpetual inventory system), good for you! You already have a good sense of what needs to be done to improve inventory management in your business.
And since it seems like implementing this method is already on your to-do list—I won’t keep you waiting any longer.
Let's jump right in.
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What is Perpetual Inventory?
Perpetual inventory is an accounting method that records sale transactions, stock replenishments, returns, and any inventory adjustments in real time.
Ecommerce businesses with large product portfolios and fast-moving items may benefit from this method, as it allows for better inventory level control and decision-making when replenishing stock.
What is a Perpetual Inventory System?
The perpetual inventory system works like a self-updating ledger. It measures your inventory levels based on your electronic logs rather than physical counts.
But it ensures accuracy and timely information by implementing measures to:
- deduct the stock quantity after shoppers complete their orders
- add delivered items upon receipt to update inventory levels
- adjust inventory balances during returns and exchanges
To enable this capability, you’ll need to set up advanced inventory management software and other components, such as point-of-sale systems (POS), barcode scanners, and RFID tags.
Perpetual Inventory vs Periodic Inventory Systems: Differences and Pros & Cons
Perpetual inventory system updates your records as your items move in and out.
For periodic systems (which you also know as option 1), you’ll have to update them yourself after each accounting period.
Let’s examine how this key difference relates to different facets of your ecommerce business:
| Perpetual Inventory System | Periodic Inventory System | Winner | |
| Record-keeping | The accounting system reflects real-time updates with every transaction | Updated manually at intervals | Perpetual inventory system (real-time updates) |
| COGS accounting | Automatically debits the COGS account and credits the inventory account by the cost of the item sold | Calculated at the end of the accounting period | Perpetual inventory system (automatic tracking) |
| Cost | Higher upfront costs for hardware, software licenses, system integration, and staff training | Lower setup costs, but higher ongoing labor | Periodic inventory system (lower initial cost) |
| Reporting | Generates real-time reports and analytics | Reports generated after period-end adjustments | Perpetual inventory system (real-time insights) |
| Demand forecasting | Real-time inventory information improves forecasting accuracy | Limited forecasting accuracy due to reliance on periodic counts’ historical data | Perpetual inventory system (improved accuracy) |
| Physical inventory counts | May still require periodic physical counts for verification, but this will be less frequent | Necessary to reconcile records | Perpetual inventory system (fewer counts needed) |
| Data integration | Seamless data flow, thanks to integration with other systems | Operates in isolation—information must be manually synchronized with other systems | Perpetual inventory system (better integration) |
As you can see, there’s minimal trade-off for choosing the sophistication of perpetual systems over the simplicity of periodic ones.
Perpetual inventory costs
The primary downside is that perpetual inventory systems are expensive to implement, which can be a dealbreaker for some SMBs.
A quick example of how much it can cost: Terraces Menswear spent approximately $18,000 to get started.
Setup costs included:
- Software and licenses: Around $10,000
- Hardware (ex: scanners and servers): Around $5,000
- Training and implementation: Around $3,000
Depending on the size and requirements of your business, these figures can go a lot higher.
The good news is that the payback is quick and ongoing maintenance costs are low.
To get all the deets on IMS costs, check out our guide to how much inventory management software costs.
According to makeup for men brand Formen CEO, Andrew Grella:
The return on this investment became evident within a few months through better stock management and increased customer satisfaction, outweighing the initial costs involved.
Perpetual systems allow ecommerce brands like yours to gain more precise control over stock levels.
Its automation and continuous tracking system leads to more efficient financial reporting for high-volume sales.
But it’s not always 100% accurate.
Your system inventory levels may not always match real-life quantities due to human error, data entry mistakes, or technical glitches.
The perpetual inventory method keeps everything running smoothly day-to-day, but you still need to perform regular physical audits to ensure long-term accuracy.
On the other hand, periodic systems are simpler and cheaper to implement. They’re also easier to maintain.
However, your journal entries and other inventory records may lag behind day-to-day movements.
These discrepancies can negatively impact your business in a number of ways and lead to recurring inventory management challenges, such as stockouts or overstocking, if not resolved.
Formulas And Metrics Used In Perpetual Inventory
Inventory management formulas clue you in on important matters like reorder points, lead time, order quantity, and safety stocks.
They’re also imperative for precise inventory valuation and financial reporting.
Here are the most important ones to keep in mind when managing inventory and maximizing profits.
Cost of goods sold (COGS)
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS calculates how much it costs to produce or purchase the goods you sell during a period.
Inventory costs include direct expenses like raw materials, labor, and manufacturing overhead (e.g., utilities and lease payments).
The perpetual system automatically calculates COGS by multiplying the units sold by the per-unit cost. You can double-check it and troubleshoot discrepancies using the formula above.
Inventory turnover ratio
Inventory Turnover Ratio = COGS / Average Inventory
This ratio measures how often you sell and replace inventory. This real-time data can help you identify and get rid of slow-moving inventory items.
To compute average inventory, you’ll need to add the beginning inventory and ending inventory and divide the sum by two, like this:
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Economic order quantity (EOQ)
EOQ = √(2 x Demand x Ordering Cost) / Holding Cost
EOQ optimizes reorder points by determining the ideal quantity to order when the amount of inventory fall below your system threshold.
It ensures sufficient on-hand stocks while minimizing ordering and holding costs.
Gross profit
Gross Profit = Revenue – COGS
Gross profit is the amount you earn from sales after subtracting the COGS. In a perpetual system, you can calculate it anytime to tweak your pricing or inventory strategies as needed.
Weighted average cost (WAC)
Weighted Average Cost = (Beginning Inventory Value + Additional Purchases) / Total Units Available for Sale
Perpetual systems continuously update inventory with each sale and purchase.
To smooth out cost fluctuations, WAC calculates COGS and ending inventory values by averaging costs in real time.
FIFO and LIFO methods
First in, first out (FIFO) and last in, first out (LIFO) are alternative inventory valuation methods used for WAC.
Your system assigns the cost based on the acquisition order under FIFO. It operates on the principle that the oldest stocks must be used or sold first.
Conversely, LIFO updates inventory records by selling the most recently purchased items first. It helps manage cost fluctuations, especially for perishable goods or during inflationary periods.
FIFO and LIFO can be challenging to track in a periodic system.
With the perpetual system’s real-time updates, these methods more accurately reflect inventory flow and cost impact.
How Perpetual Inventory Systems Work
Implementing a perpetual inventory system follows several steps.
To help you see what this looks like in action, I’ve put together a hypothetical scenario using a fictional brand.
Meet Petal and Playwear, a sustainable children's clothing wholesaler and manufacturer. This growing ecommerce company figured that a perpetual inventory system could help them manage their sprawling inventory more efficiently.
Let’s dive in to see how Petal and Playwear carried out the following tasks:
1. Set up your inventory management system
Start by choosing the right inventory management system.
An inventory management system forms the foundation for recording and updating stock levels automatically, so you’ll get a clear picture of them at any given time.
Plus, they sync relevant information through integration with accounting, warehouse management, POS systems, ecommerce platforms, and other sales channels, assuring consistency in all business operations.
These are key reasons implementing one should be the first order of business if you’re looking to adopt a perpetual inventory system.
What Petal and Playwear did:
Petal and Playwear implemented MRPeasy (which we highly recommend for manufacturing companies.) MRPeasy also conveniently integrated with the brand’s ecommerce platform, Shopify.
As a result, when a customer buys a "Playful Romper" in blue, their IMS automatically updates with the new stock level.
MRPEasy isn’t our only pick for an IMS.
We made a list of the top inventory management tools available in the market, making it easier to find one that fits your business needs and works with your ecommerce platform:
2. Organize a reliable inventory tracking system
Next up is setting up a system to track inventory movement going forward.
Barcode scanners and RFID tracking systems—which should be compatible with your IMS–can handle the heavy lifting for you.
These modern tools work together to keep you updated and remove the need for those laborious manual counts that no one on your team probably enjoys doing anyway.
When logging inventory data in your system, keep precision top of mind.
The more granular the information is, the easier it will be to keep track of the item. So provide pertinent details like:
- Product name
- Description
- Total Cost and Selling Price
- Product attributes (material, size, color, expiration date, warranty, etc.)
Doing so helps determine the correct stock levels and provides a solid foundation for your newly minted perpetual inventory system.
What Petal and Playwear did:
Since Petal and Playwear uses MRPeasy, it could easily implement the platform’s barcode scanning system to streamline inventory tracking.
With it, each product gets a barcode printed on its tag.
As new stock, say 180 units of Playful Romper in pink, arrives, the warehouse team can scan each one into the system, updating its stock level.
3. Establish inventory control policies
All systems go? Not quite.
Before hitting cruise control, you need to determine the suitable inventory control policies to supplement your system.
Here are some ideas:
- Regular inventory audits. Determine how often you'll conduct spot checks and full inventory audits.
- Handling lost or damaged inventory. Create a plan for handling lost and damaged goods
- Stock replenishment procedures. Know when to replenish stock, so you're never caught short or overflowing.
- Returns and adjustments. Set clear procedures for handling customer returns and supplier exchanges.
What Petal and Playwear did:
Before sitting back and setting its perpetual inventory system in motion, Petal and Playwear made plans to conduct cycle counts every quarter and random spot checks every two weeks.
The management also identified selected inventory team members to investigate the root causes of any discrepancies (ex: 97 units of Playful Romper in green are recorded, but the systems show 99).
The brand also established SOPs for dealing with product returns and lost or damaged goods.
For instance, returned items need to be checked upon arrival.
If they’re in great condition, they are restocked and reintroduced to the inventory system.
Flawed items, on the other hand, are tagged as unsellable and moved to a designated area in the warehouse.
4. Train staff on effective inventory management
Platforms? Check.
Policies? Check.
People? Don't let them slip your mind.
You need trained personnel to manage your inventory effectively. Proper technology implementation and adoption strategies are key to this.
What does this entail? Two things:
First, ensure employee buy-in by explaining the value of a perpetual inventory system.
Outline the impact and benefits of using tools like an IMS, and the value of keeping these records up-to-date—including saying goodbye to days full of manually counting inventory and deciphering complicated spreadsheets.
Next, teach them how to properly use new technology.
People and organizational change have been cited as the most common challenge when undergoing digital transformation.
Empower your employees by providing hands-on training sessions on how to use barcode scanners or RFIDs and how to operate your inventory management system.
In addition, offer employees an internal support channel for the inventory system in your communication tool.
What Petal and Playwear did:
Petal and Playwear management held a meeting to explain the benefits of the new system, recounting instances when inventory distortion impacted the business poorly.
(Remember that shortage of blue rompers that took place before the holidays?)
They also offered training sessions to employees, so they could learn how to use barcode scanners and MRPeasy.
During these sessions, they practiced scanning items, entering data, and generating reports.
5. Monitor and update continuously
Establishing a perpetual inventory system isn’t a one-and-done affair. It’s hard to get it right the first time, so refinement is part of the program.
Here’s what to watch out for and adjust if needed:
- Inventory valuation. Keep your inventory valuation up to date using methods like FIFO, LIFO, or weighted average cost. Use them to determine the real value of your inventory and to simplify your accounting.
- Inventory levels. Stay vigilant for discrepancies. If something doesn’t add up—like losses and damages—get to the bottom of it and update your inventory records while you’re at it.
- Platforms and processes. Regularly update your inventory management software and processes to keep pace with your business goals. What worked yesterday could use a small tweak today.
- Inventory performance. Keep an eye on how your system is performing. If it’s not helping you make smarter decisions, that’s your signal to adjust and improve.
What Petal and Playwear did:
Petal and Playwear chose the FIFO method for inventory valuation. For example, the first batch of summer rompers received in June should be disposed of first before the next batch arrives.
Petal and Playwear also scheduled quarterly and annual evaluations of its inventory management processes.
If the brand sees signs that it’s outgrowing its tools, it could upgrade to a more advanced barcode scanning system or add new inventory management software features.
It’s worth pointing out: Even the most advanced perpetual inventory system isn’t faultless.
If you’re relying on it to improve your inventory forecasting prowess, you’ll need to do tie it with forward-looking analysis.
Online fashion wholesaler Dressin conducts regular market research, makes seasonal adjustments, and performs scenario analyses.
Manager Mengtian Chow shared:
This holistic approach isn't unique to us—many successful ecommerce businesses employ similar tactics to stay agile and responsive to market changes.
It's about combining the real-time data from perpetual inventory systems with forward-looking analysis to make informed decisions.
A perpetual inventory system can transform business efficiency, but there are still things you need to keep tabs on such as enforcing inventory control policies, training your staff, and combining strategies to improve forecasts.
Perpetual Inventory For Different Business Sizes
Multinational brands, growing ecommerce, solopreneurs—everyone needs a handle on their inventory.
Let’s see how perpetual inventory management can help any type of ecommerce business, whether it’s B2B, DTC, wholesale, or subscription-based.
Startups and small brands
As a budding company, juggling sales, customer support, and marketing leaves little time for accurate inventory tracking.
This is especially the case if you rely on manual spreadsheets and physical counts—procedures that are both error-prone and time-consuming.
Perpetual inventory automates these processes, freeing up staff and enhancing stock visibility. But setting it up requires a hefty investment that small businesses may not have access to.
Workarounds are available, however.
For instance, DTC brand Prevelo Bikes Founder, Jacob Rheuban, pointed that simple systems exist, and they do a decent job of providing updated data.
The simplest systems (like Shopify’s built-in system) simply maintain a running tally of product available to sell.
When you receive a shipment, you add the amount of product in the shipment to the inventory system. When you sell a product, it is automatically deducted from the inventory system.
It's a good place to start. You can level up your systems and processes as your business grows.
Medium-sized businesses
Medium-sized companies rely on perpetual systems to improve operations and customer service.
Having a growing customer base or scaling your ecommerce site is easier with real-time inventory management.
Kabeier, a baby clothing company that’s been around for 15 years, has been using a perpetual inventory system for several years.
It’s been instrumental in managing our stock levels efficiently, especially given the seasonal nature of baby clothing.
For example, during our peak periods, like holiday seasons, the system has helped us maintain optimal stock levels and avoid overstocking or stockouts.
Enterprise-level organizations
Many big players like Walgreens and Amazon would have to cease operations for months (possibly even years) if they had to perform manual inventory counts.
Perpetual inventory adapts to their supply chain complexity and magnitude, and even scale their initiatives.
For instance, Walgreens planned to fulfill its ecommerce shipments from its stores within an hour of receiving the order—establishing real-time stock level information is integral to making this happen.
However, since this information is primarily dependent on the system, it needs to be free from glitches and interruptions.
Implementation and training are high-stakes for enterprises because not only is the investment far significant, it’s also harder to rectify, making its impact more evident.
William Carlin, Chief Marketing Officer of Racklify, pointed out:
Technical issues can occasionally lead to brief interruptions in data flow [...] No system can provide truly instantaneous updates—there will always be a slight delay in data transmission.
Allocating resources for ongoing maintenance and system upgrades is always a good idea. But Carlin advised setting reserve quantities to account for any potential data delays and discrepancies.
Final Thoughts
Bid adieu to long and tiresome periodic inventory counts.
Perpetual inventory systems automates inventory tracking and has plenty of perks. But it’s not a standalone solution, as it still needs human intervention to keep the wheels turning.
So guide your team.
Teach them the importance of using tools like inventory management software, as well as how to stick to inventory control polices and monitor and update the system.
Discover more ways to stock up on inventory management success:
- Cloud-Based Inventory Management: The Guide For More Efficient Stock Tracking
- Top 10 Inventory Management Challenges And How To Solve Them
- Lean Inventory: Highly Functional Warehouses Propel Businesses To Success In Ecommerce
- ABC Inventory Analysis: What It Is & How to Calculate For Success
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Perpetual Inventory FAQs
If you have further questions about implementing and managing a perpetual inventory system, you might find the answer below:
How does a perpetual inventory system affect financial statements?
Perpetual inventory systems streamline the financial reporting process. The system records every transaction as it happens, so your accounting records (ex: balance sheet and income statement) reflect up-to-date figures.
With real-time data on inventory levels, costs, and sales available around the clock, you won’t have to scramble to count and adjust everything at the end of the fiscal year.
What are the initial setup costs for a perpetual inventory system?
It’s hard to come up with a precise figure because the costs will depend on your ecommerce requirements and business size.
However, you can expect your initial investment to be spread out over software implementation, hardware, integration, and training.
SMB ecommerce brand Terraces Menswear invested about $18,000 to adopt a perpetual inventory system.
How does a perpetual inventory system handle damaged or lost inventory?
Perpetual inventory systems only tracks what goes in and goes out. To record damaged, lost, or disappearing inventory needs human intervention.
Employees can log them into the system and removing them from the recorded available stock.
According to enVista‘s Director of Supply Chain Consulting, Bobby Hathaway, “Often an assumed loss percentage is used in a perpetual system to offset the physical losses over time.”
What types of businesses benefit the most from perpetual inventory systems?
According to Hathaway, the answer is any “organization with high item volume and fast-moving SKUs/item.”
Most online companies further benefit from having it because your ecommerce platform needs to reflect the correct number of stock levels.
Or else, shoppers may end up with unavailable products in their carts.
Plus, ecommerce inventory management involves having stocks spread across multiple warehouses, so it helps to have a bird’s eye view of their movement.
But there are some ecommerce businesses that can run well without relying on a perpetual system.
The reason for this could be that they don’t keep inventory (ex: dropshippers, artisans, on-demand suppliers, pre-order vendors) or they have unlimited inventory (ex: digital product sellers).
