You might have heard that there are two main methods for tracking your inventory: periodic and perpetual. Which inventory system is the right one for your handmade business?
The IRS and GAAP (Generally Accepted Accounting Principles) rules both state that you have the choice to either count your complete inventory on an annual basis once a year or maintain a perpetual (constantly counting) counting system.
Periodic Inventory involves counting and recording your stock levels every once in a while (i.e. on a "periodic" basis). For most businesses that use this approach, this count only occurs annually to provide financial figures for tax purposes however you can also use this method quarterly or even monthly if your workflow allows. Most periodic systems are very simple spreadsheets or paper journals.
The periodic method involves stopping all production and sales on a specific date and then undertaking a complete count of your inventory. The number on hand is noted, along with a calculated unit price in your periodic inventory system. Your quantity on hand multiplied by your unit price becomes your material inventory valuation for the material.
This method is relatively easy if you have a very small inventory as you only need to set aside a day or so at the end of the year to do your basic count, however can be tricky to calculate materials that are now tied up in your unsold stock and the true "landed cost" of your materials.
Because you are only counting your stock at the end of the year, you won't have much visibility on your actual stock levels, so you'll need to be "eyeballing" your stock regularily to determine what materials you are running low on. You'll also be completely unaware of any unexpected stock loss (i.e. damaged stock) so can do little about this situation when it is found at the end of the year.
The word ‘perpetual’ means doing something on an ongoing basis.
Perpetual inventory therefore means that the counts and calculations are done constantly in real time, rather than at certain times during the year.
Rather than updating a spreadsheet with new counts each year, you update a system with stock changes as they occur: when you make your product, sell it or purchase new stock. This gives you real-time data, so you can see your exact stock on hand at any point in time.
Popular perpetual Inventory systems include Craftybase Inventory + Bookkeeping, Quickbooks Manufacturing and Unleashed.
Unlike Unleashed and Quickbooks, Craftybase is designed specifically for small handmade makers - if you create your own products in—house this solution will most likely work best with your existing workflow.
A perpetual system does all the calculations that are required to produce the numbers you need. You'll however be responsible for is entering in the data for your expenses and manufactures as they occur and manually checking for accuracy via regular stocktakes. As you'll be seeing your stock levels in real time, you can react to low stock situations quickly and even predict when they will occur ahead of time. Stocktaking using the cycle count approach allows you to assess and refine your usage of materials and make improvements to your processes throughout the year.