Before technology made some major changes to accounting options, particularly in terms of software, the periodic inventory system was highly regarded. It wasn’t a perfect system, but in the end, many felt that it didn’t need to be. They would make the case that the downsides are significantly outweighed by the benefits of using the periodic inventory system. What is perhaps most interesting about this is the fact that there are still many, many proponents of a period inventory system in the present. The major competitor for period inventory systems are perpetual inventory systems. The two are inevitably compared, and there are a number of companies and individuals who believe that a period inventory system is the right way to go for their business.
However, just as many people will argue that the periodic inventory system is a massive waste of time. They will further suggest that when it comes to making a long-term investment in the way your business remains organized, you can’t afford to deal in something that has the potential to be inaccurate. In order to make a decision for yourself, you are going to want to take the subject of periodic inventory system pros and cons seriously.
The Pros of the Periodic Inventory System
Here are some of the pros of a public inventory system that you can keep in mind:
1. Easy to Implement.
One of the biggest benefits to the presence of a periodic inventory system is the way it is remarkably easy to implement. You can add this system to your business in hardly any time at all. Certainly, it is less stressful than any other option for maintaining an awareness of your inventory. Physically counting the inventory is something you can literally do whenever you feel like it. Most businesses that work with this system will roll it out once a year. However, in the end, you are free to define “periodic” as you please. Remember that the orders placed throughout your year will be added to the ending inventory for last year.
2. Cheap to Implement.
Again, if you want the easiest system possible, then the periodic inventory system is going to be absolutely perfect. You don’t have to invest in costly software solutions with this option. Technically, you don’t have to invest much of anything, except for the time involved in taking a physical inventory. Furthermore, as long as you are willing to put in that time, your costs are never technically going to go up either.
3. Ideal for Smaller Businesses.
As you can imagine, very small businesses are perhaps the best fit for a system such as this. We’re talking about 1-2 people, a limited inventory, and only a few dozen orders placed throughout the year. Larger businesses can use this system, too, but things can naturally get more complicated, when we start talking about multiple employees, and thousands of orders per year.
The Cons of the Periodic Inventory System
Here are some of the cons of periodic inventory systems that you will want to appreciate:
One of the worst things you can say about a periodic inventory system is the fact that you are dealing with something that can be highly inaccurate. Keep in mind that an accounting record is modified at the end of your year, in order to reflect your physical inventory count. Because of this, the system is inherently flawed. You can’t ensure accuracy at all times. You can only be sure of the accuracy to within a reasonable degree. For some businesses, this may not be a problem, particularly if we are dealing with a very small business. However, larger businesses are going to need to be aware that when you use this system, inaccuracies aren’t the norm, but they aren’t rare either.
2. Labor Intensive.
If you have a very limited inventory, with only a few dozen orders for the year, using the periodic inventory system isn’t all that difficult. You can even punch things in to an Excel document. However, when your business grows, a periodic inventory system can prove to be highly problematic. Taking a physical inventory can amount to a time demand that you really shouldn’t try to meet. Particularly with small businesses, it can be challenging to find the time and energy to make sure a periodic inventory system is handled correctly. This is where your mistakes can start to appear.
3. Exercising Control.
One more thing to consider is that exercising control over your inventory is something that is going to become a good deal more difficult. Gauging the degree of theft can become more difficult, as well.
The periodic inventory system is clearly not lacking in benefits, particularly when the stakes are small. However, for larger businesses, some challenging factors can begin to plague the integrity of the system. This is definitely a complex subject.
Natalie Regoli is a child of God, devoted wife, and mother of two boys. She has a Master's Degree in Law from The University of Texas. Natalie has been published in several national journals and has been practicing law for 18 years.