Partner and Consulting CFO for Pro Back Office, Scott Palka, shares his insight on what inventory method is better for a small manufacturing company when you don’t use barcoding – perpetual or periodic?
SITUATION: A small manufacturing company is currently using Sage 50 for their accounting and another program for manufacturing. They are in the beginning stages of an ERP implementation, and don't use barcoding. Should they use Perpetual or Periodic inventory?
In general, perpetual inventory is highly preferred. When used “correctly” perpetual provides the backbone for Materials Requirement Planning and also Available to Sell Inventory (on-hand, less future commitments).
Even if you don’t have scanning, you should have the basics, inventory items are “planned” and the PO’s generated. When the PO’s are received they should create additional on-hand quantity, reduce your purchase commitments, and create AP (on the General Ledger).
Deciding to go with periodic inventory is somewhat dependent on your inventory levels and “unplanned” demand. If you keep the levels low and demand is unpredictable you may sell or commit to sell something you don’t have. If lead time is short maybe not a crisis but still a potential fire drill. My preference is always perpetual with frequent even real time updates depending on transaction velocity. With proper planning, software, and procedures this is easy to achieve. If, for example, you use Sales Orders (SO), those create demand against your on-hand count, when the order is shipped, the SO is converted to an Invoice, and at that point in time you recognize revenue/COGS increase AR and decrease FG inventory. Letting you have real time rev and cogs as well as know what you actually have available to sell compared to what is just on the shelf. In this day and age, it is very difficult to make a case for periodic inventory.
In this case, Sage 50 does not directly support MRP and ATS without the use of add on software (for example MISYS). I strongly suggest that having your business requirements and processes dialed in are a pre-cursor to implementing any ERP package.
If you have any additional questions about inventory options for your small business, you can reach Scott and the Pro Back Office team at firstname.lastname@example.org or 858.622.1681. We can help figure out the best way to handle inventory in your system and how to decide if you should use either perpetual or periodic inventory methods as well as many other small business strategic consulting services.