Why are storage costs reduced under a perpetual inventory system?
A brief introduction to why are storage costs reduced under a perpetual inventory system
A brief introduction to why are storage costs reduced under a perpetual inventory system:
When you start a business, you will be surely concerned about the environment in which you are conducting all your activities. Plus there are many factors that could give you a tough time if not handled carefully, one of which is your increasing costs of the business and reduction in the profit simultaneously. A business should be surely incorporated with the view that you will carry out every operation to increase the profit ratio and reduce all the affecting costs of your business.
One would wonder why the storage costs are reduced under a perpetual inventory system, but you will be convinced when you will finish reading this article. Costs when reduced in your business will contribute at a great scale in terms of increasing the profit of your business. In addition to this, employing professional services and installing the latest inventory management software could also prove helpful in terms of guiding you about the changes that are needed to be made for increasing the profit of your business.
What is a Perpetual Inventory System and why are storage costs reduced under a perpetual inventory system:
It is a type of inventory system that will help you to make decisions right away at the very present time when any misconduct or error occurs. The perpetual inventory system is also known as the JIT (Just-in-time) system because all your sales and purchases related to the inventory of your business are recorded on the spot when they occur.
Furthermore, many businesses are using perpetual inventory systems because it helps to a great extent to decrease the storage costs of your business. Such a system helps you in checking the efficiency of your stores, immediate knowledge of any misplaced inventory or theft, and managing your working capital accordingly. There is no doubt that you should carry out every activity while keeping the view that your business is earning more and spending less. Or even when a critical situation occurs, try to balance the revenues and expenses of your business even if you are not earning much profit. Using automated inventory management software and techniques would help your business to run smoothly and earn a good amount of profit by satisfying the customers.
Inventory Management Planning:
If we look around the successful businesses, we could absorb the fact that they are successful just due to their effective inventory management planning and trying hard to keep on going on the right path. It is very essential that before diving into anything, you must plan efficiently focusing on every sector of that thing.
Similarly, when you are doing a business, complete and thoroughly researched inventory planning should be conducted and forwarded to every employee to eliminate any confusion in the future. Later on, effective steps should be taken to accomplish that plan. This process is called inventory planning. Through this, you will be successfully able to reduce the costs of your business and increase the ROI (Return on investment). Moreover, an effective and focused inventory management plan will let you know why storage costs are reduced under a perpetual inventory system.
Importance of Perpetual Inventory System
As we have discussed above, the perpetual inventory system when used, helps you to take the necessary decisions regarding the inventory of your business right away. It assists you to avoid delays and also check your inventory from time to time by going through the income statements and balance sheet of your business.
In short, we could say that the perpetual inventory system plays a vital role in the record-keeping of your business’s inventory and updating it regularly without any carelessness. You will know the exact position of your business, what are the order levels, how the sales are conducted, what the current ratio of profit is, and what are the total storage costs being spent. Another most important question will be answered by using a perpetual inventory system in your business. That is why the storage costs are reduced under a perpetual system.
Let us further dive into those important factors that will show that how important a perpetual inventory system is to reduce the storage costs of your business:
- Quality-oriented products:
Under a perpetual inventory system, all the important decisions relevant to the inventory of your business are taken right on time. This in turn helps your business to create quality goods by understanding the demands of your targeted audience. Moreover, when the goods are produced according to the customer demand, you will be able to sell more products than ever. In addition to this, when all your inventory is sold out, there are very few chances of overstocking issues which will let you reduce the storage costs of your business.
- Decisions are taken on time:
It does not matter whether you are working in a small company or you are a part of a large enterprise, all the important decisions must be taken in time so that you will not regret them in the future. This is where your inventory planning comes to play. In addition to this, as stated above the perpetual inventory management system helps a lot in monitoring properly the inventory of your business and taking important decisions right on time.
Moreover, these decisions could be related to anything that could affect the normal workings of your business. For instance; knowing the re-order levels, what is the current ratio of profit, how will it increase, and how the storage costs could be reduced under the perpetual inventory system, etc. all such queries when managed right on time, you will see a prominent rise in the profits of your business and finally understand the fact that why storage costs are reduced under a perpetual inventory system.
- Excess or obsolete inventory checked and eliminated:
In a perpetual inventory system, all parts of the inventory are managed and checked from time to time to avoid any issues later. Similarly, if your business is suffering from expired inventory or obsolete products, they can be recognized easily and eliminated at the very present time.
This will help you to reduce the storage costs that you are spending on the storage of your inventory and holding them for a long time. It is no secret that until an inventory is sold to the customers, it is fully checked and maintained until that time. All these repairs and maintenance costs are also taken from the profit of your business. Which in turn reduces it, therefore using a perpetual inventory system will help you understand how and why storage costs are reduced by using it.
- Professionals services:
When a business uses a perpetual inventory system, it will look for highly professional and expedient employees. Because all the sectors of the business under this inventory system are checked regularly and also updated timely, therefore, it is very important that you must give your inventory to the hands of capable officials so they can also guide you with future respect.
However, taking services of automated inventory planning software like Inventooly would assist you more quickly and efficiently to reduce your storage costs. Because it monitors your inventory 24/7 and also updates you on your mobile phone. Using such automated software also gives rise to a major decrease and reduction in manual work which has a very positive impact on your business.
Perpetual inventory system helps to decrease storage costs:
As stated above, it is no secret that a perpetual inventory system when employed helps to reduce the storage costs of your business at a great scale. Moreover, you will be able to manage the inventory of your business more effectively than ever. Because all the decisions about the purchases and sales are made right on time when needed. It is very necessary because when you rely on time and give space to such important matters, you will suffer from numerous problems like overstocking, reduction in profit, higher expense, etc.
Following are discussed some of the factors that will help you understand that why are storage costs reduced under a perpetual inventory system:
- Expired inventory is managed:
Under a perpetual inventory system, you will take all the necessary steps relevant to the inventory of your business right away that will help you recognize which item of inventory is generating more sales. On the other hand, you will also be able to know what products are not gaining sales and only eating up the costs of your business. This will make you recognize those products which are expired and cannot be sold to the customers now.
The ultimate way of dealing with expired inventory is simply by eliminating it right away when recognized. It will help you to reduce the storage costs of the inventory of your business.
- Storage costs are checked regularly:
While taking important decisions and recording the sales and purchases of your business, you can also observe how much expense has been conducted in terms of storage costs over your business’s inventory.
You should always try your level best to minimize the storage costs as much as possible. Wonder why? Because all these expenses are done from the portion of the profit of your business. Therefore, using a perpetual inventory system would be very helpful in terms of reducing the storage costs of your business.
- The inventory management system is checked:
To answer the question of why are the storage costs reduced under a perpetual inventory system, you can also observe the fact that in this inventory system, you can check that your inventory management is running as expected or not? All the matters that are relevant to the inventory of your business smoothly operating or not? Such kinds of things can easily be observed when you utilize the perpetual inventory system for your business.
- COGS statement is checked:
The COGS or cost of goods sold statement of your business plays a vital role in knowing and evaluating the accurate position of your business in the market. You can see by this statement yourself what is the ratio of expenses being spent and what are the incomes coming in your business.
Moreover, the COGS statement is very crucial when it comes to knowing about the storage costs of your inventory. Because it clearly shows how much inventory is left in your business that is yet to be sold. By which you can take the idea that those items of the inventory are just eating up the costs of your business. Therefore, using a perpetual inventory system helps a lot in maintaining a well-balanced COGS and reducing the storage costs of your business.
Briefly explained above, are some of the reasons and solutions why storage costs are reduced under a perpetual inventory system. When doing a business, we mostly do what everyone is doing, but to stand apart and climb the ladder in our business journey, we need to take some extra steps that help us differentiate from others in terms of recognition and overall business.