Why‌ ‌storage‌ ‌costs‌ ‌are‌ ‌reduced‌ ‌under‌ ‌a‌ ‌perpetual‌ ‌inventory‌ ‌system‌

Accounting records continuously disclose the amount of inventory. Net income for a merchandising enterprise is computed by. subtracting operating expenses from gross profit.

  Ayaz Yasin

Posted on: 21 Oct 2021

Why‌ ‌storage‌ ‌costs‌ ‌are‌ ‌reduced‌ ‌under‌ ‌a‌ ‌perpetual‌ ‌inventory‌ ‌system‌


Whenever we talk about a large or even small-scale business, the essential thing is the product to be sold or the inventory. It is a known fact that a list is being considered the basis of every business because let us say that there is no business if there is no inventory. But the thing is that inventory or the stock should be managed effectively to earn a handsome amount of profit. In addition to this, lists are handled according to the methods used by the businesses. The two most common types of inventory methods include the perpetual inventory method and the periodic inventory system. However, all of us are aware that storage costs are reduced under a perpetual inventory system. 

In addition to this, stock, if stored at a large scale, could also hinder the everyday workings of your business. However, one would say that stockpiling is necessary for any business in case of emergency use. But one should also be aware of the conditions that would occur if unnecessary stock is being held. The first and foremost effect would be that it will raise your storage and carrying costs, which will affect your business’s profit ratios. As we have discussed above, the question which arises is how the storage costs are reduced under a perpetual inventory management system? And to get the answer, we must dig deep into its details.

What is perpetual inventory?

Perpetual inventory, also known as just-in-time inventory, helps you take necessary measures related to the list of your business in real-time. It is the preferable method of handling the inventory management system because when the decisions are left pending, the problems are increased continuously, which puts your business in a great dilemma. Therefore, it is the most well-known system used by some of the major companies, also like Amazon. 

Furthermore, if we talk about a perpetual inventory system, one would wonder that the decisions are taken quickly and need to be taken right away. There is no doubt that the perpetual system helps take some of the most critical decisions more rapidly than the periodic system. No one would prefer that the operations related to the inventories are delayed and not handled quite effectively; in such cases, a perpetual inventory system comes into play.

Why is the Perpetual inventory system important?

When we talk about inventory, the single term refers to numerous operations related to it. As stated above, inventory is the basis of any business, as long as it is handled concernedly. If any neglections are made relevant to inventory, all your business’s matters are affected at a high cost! Therefore, when decisions are made, the method of management of inventory must be handled accordingly. 

A perpetual inventory system helps you in every regard to taking the necessary and quick decisions at the right time when it is needed the most, which in turn helps you to reduce the storage costs of the inventory of your business. It is no secret that the dream of doing any business is to earn limitlessly and achieve the vision you have planned. But we sometimes don’t realize that to fulfill our dream, some critical and focused steps should be taken. Some of the significant points that will elaborate on the importance of perpetual inventory system are listed below;

  • CGS is updated from time to time:

COGS (Cost of goods sold) statement is of supreme importance in any business. Wonder why? Because it helps you to determine what are the expenses of your business and what is the ratio of profit. If your costs increase the values of assets, then your income is negative, proving that your business is going at a loss. However, when your expenses are managed in a normalized ratio, your payment is positive, which tells you that your business is doing well.

Estimated CGS correctly is an essential aspect of any business; therefore, using the perpetual inventory method helps you do so. Because of an incorrect income statement, it can affect all the entire working of the company. That is why the pros handling your income statement’s record should be able to avoid any discrepancy. However, employing an automated system of CGS formation could help you a lot in avoiding any mistakes.

  • All the areas of inventory are checked:

Another prominent and influential point that shows that inventory storage costs are minimized under a perpetual inventory system is that, without delays, all aspects of the inventory are checked thoroughly and at once. For instance, when a sale has occurred, the stock is minimized by that amount. When the company is making a purchase, it is recorded in the amount of stock right away, which helps a lot in the critical decisions related to the inventory. 

  • Orders are organized:

When working in the business as an owner or even as an employee, you need to be careful regarding your company orders. As the management of orders is an essential part of any business, you should know when to order, when to deliver, and ship your order to the relevant customer.

With the help of the perpetual inventory system, all your orders are checked up at the right time and recorded at the very present moment; that is why it is also known as the JUST-IN-TIME method. 

  • You know when to re-order:

Another factor in which you are helped a lot by using a perpetual inventory system because you know when you have to re-order the stock. In addition to this, it guides you skillfully when your store is reserved at a large scale; you can say that there is no need for re-ordering it.

Likewise, when your order is delivered or in transition, you are continuously notified if you employ the perpetual inventory system. Therefore, using this method of handling your inventory is very useful because it will encourage you to take necessary steps when needed. 

Role of perpetual inventory system in saving costs:

As we have discussed above, using a perpetual inventory system helps you a lot in making changes and implementing the right decisions at the right time. In addition to this, this system also guides you extremely well about managing your costs and decreasing them as much as you can. Furthermore, the delays in business activities affect the profit of your business and challenge the credibility of your business in front of your clients. 

Many of us would have heard, “ one bad customer experience is equal to the loss of one hundred new customers.” No one would want that, right? No one would want to risk the reputation of the business being called upon in front of everyone. As we are aware that when an order is delayed, or the expectations of any customer are not fulfilled according to their imagination, it affects a lot in the retention of customers. Therefore using this type of inventory management system also helps you a great deal in terms of saving and minimizing your costs of storing goods.

Following are discussed the main points about the role of perpetual inventory systems in reducing your business costs.

-Routinely checking of the stock:

When your stock is being checked and processed routinely, without any interruption, you could take the crucial decisions like when to order, when to ship, and when to eliminate the stock. With the help of a perpetual inventory system, you would be able to save your costs. 

When your orders are monitored daily, you can observe which product is the hot-selling. So you can save the cost to order more of the relevant products. And also, you can recognize which product is eating the price and not generating reasonable or expected revenue.

-Getting rid of excess stock at the right time:

Cost of production is the main factor that should be considered when dealing with inventory. It should be effectively measured which products are laying in the storage houses idly. 

No one would want the business to face troubles, and there is an excess amount of stock preserved at the back end of the company. So the perpetual inventory system helps you manage your excess inventory, which reduces the cost of production of those goods that are useless for your business. As a result, the large amount of your storage cost is decreased and saved. 

-Manages the carrying or holding costs effectively:

When we talk about costs, the holding or carrying costs are the ones that are creating most of the trouble in decreasing our profit ratio. Therefore, when you are using a perpetual inventory system to manage your inventory, you can efficiently operate the stocks of your business. 

Moreover, when the orders are delayed or even when the system is facing any technical issue, using a perpetual inventory system helps you greatly.

Benefits of using a perpetual inventory system in terms of minimizing storage costs:

Undoubtedly, using a perpetual inventory system in your business helps you a lot in terms of managing your stock and reducing the storage costs of your business. Similarly, there are many other benefits that perpetual inventory systems provide relevant to the storage cost of your business. Some of these advantages are discussed below;

  • Right decision at the right time:

As perpetual means just-in-time, so all the right decisions are made accordingly at the right time, for the right thing. And taking proper steps at the required time helps you manage all of the costs of your business, including storage costs.

  • Quality goods are produced:

When the decisions are being taken at the right time, the quality of the products is also checked and updated right away. If there is a lower trend noticed in the sale of any product, you could examine its purpose. After that, you could act accordingly. 

  • Waste products are eliminated timely:

By implementing a perpetual inventory system, you are at ease that all your products are examined and observed rightly by the officials. You can easily monitor all the portions of the inventory and eliminate those products that are eating up your business’s profit and costs. 

  • Expedient team of employees is hired:

To employ a perpetual inventory system, you have to hire expert employees or install effective automatic machinery to observe your inventory. 

By doing so, you could simply decrease the cost of your business and also be relieved that safe hands handle your business’s inventory. So there is no expectation of any kind of fraud or discrepancies. 

  • Accuracy of the data increases:

When you use a perpetual inventory system to manage your inventory, you are sure that all of your data is accurate. The information that should be noticed and changed accordingly is;

  1. Marketing expenses,
  2. Direct and production payments your business’s cost and,
  3. Selling expensing,
  4. Carrying or holding costs.

All of the above-stated expenses are the major ones that should be recorded and examined accurately and effectively.

  • Inventory management is strictly observed:

Managing the inventory of your business effectively is the first and foremost process that helps you run your business efficiently. After utilizing a perpetual inventory system for your business, all sectors are monitored daily without any delays. You are at ease of facing problems, later on, all the business operations are managed, and the right decisions are made accordingly, which helps you save your cost of storage.

Wrapping up:

In the end, I would like to conclude our discussion by simply stating the facts that are in front of our eyes. The perpetual inventory system is the one that helps you and guides you to make the right decision at the right time to avoid any problem later.  All of your holding costs, carrying costs, production costs, and storage costs are managed efficiently and more effectively with the help of a perpetual inventory system. Therefore, no need to feel at risk when employing this system for handling your business's inventory.