The Benefits of Perpetual Inventory Accounting for Midsized Retailers
“Small businesses suffer disproportionately large losses due to occupational fraud and abuse. The median loss for small businesses was $98,000-higher than the median loss experienced by all but the very largest organizations. Unfortunately, small businesses are less likely to be able to survive such losses and should better protect themselves from fraud.”
US Chamber of Commerce
According to the 2015 National Retail Security Survey, in 2014 retailers lost over $7 billion to administrative and paperwork errors and, alarmingly, $15 billion to employee embezzlement and internal theft.
What is perpetual accounting?
Perpetual accounting is usually a component within an inventory management system, and is sometimes referred to as ‘perpetual inventory’. There are two main ways that most mid-sized retailers will manage their accounting: periodic accounting or perpetual accounting. They’re essentially what they sound like – periodic accounting means that the general ledger is updated based on stock takes that are done throughout the year, while perpetual accounting means that the general ledger is updated every single time a transaction takes place and always displays the most recent and up-to-date view of goods sold.
Perpetual accounting records all transactions being generated in store and by online shopping baskets as they happen. This allows retailers to more conveniently and accurately verify that the balance of sales matches the physical inventory that should be in the store. The process is done automatically, without any human intervention, so it’s both faster and more secure than the manual update processes typically employed by small retail operations.
What benefits will it provide to my operations as a retailer?
Perpetual accounting benefits mid-sized retailers in a number of ways. The positive organization-wide impact of investing in a software system with perpetual accounting is felt in two main ways: financial management becomes easier, and it also becomes more accurate.
With a non-integrated accounting software setup, retailers have to accommodate the fact that during the times between stock takes (which can happen as infrequently as only once or twice a year) their balance sheet numbers for inventory and their profit and loss statements are simply not accurate. Switching to a real-time updating system removes this problem entirely, allowing store managers and chain owners to trust their numbers to be correct at any time of year. Interim financial statements can be used to effectively judge sales performance and to make business decisions.
Not only do managers and owners have more trustworthy reports and better transparency around their store operations, they also have a system that’s easier to work with and frees up their time to do other things. They can quickly perform necessary valuation of closing stock at any time and access analytics without having to involve an IT resource to create the reports by hand. For those retailers who were previously doing one big update a year, it likely meant closing business operations for the duration of that significant undertaking. The stress and lost time of that annual stock taking process is avoided by using an end-to-end, fully integrated retail software system.
What security issues will it address in my retail software system?
Although a retailer will naturally only hire those employees it considers trustworthy, employee theft of cash and inventory is one of the biggest losses of income for midsized retailers – bigger than theft and fraud perpetrated by third parties. Perpetual accounting provides greater transparency and accountability for missing inventory and missing cash, which acts as a tool for prevention as well as detection.
Retailers using a periodic or staggered accounting update method usually just adjust the year-end inventory balance so that it agrees with the physical inventory count. It’s easy to see how this can be utilized to hide theft, especially theft being perpetuated frequently and over a long period of time. Perpetual accounting helps retailers to prevent theft and costly errors by creating more checks and balances and by removing the manual intervention of a human from the information transferal process.
Occupational fraud is often a crime of opportunity in which an employee, familiar with the system, discovers a blind spot which they could theoretically take advantage of. If these blind spots (like a manual data input process) simply do not exist, employees are never presented with the opportunity to pocket a few bills or take home inventory.
Retailers who make the switch to perpetual accounting sometimes discover an employee who has been with them for years has embezzled hundreds of thousands of dollars’ worth of inventory by exploiting the weaknesses of their old accounting system. The ability to track and record shrinkage is invaluable in catching occupational fraud before it becomes a significant drain on the company, flagging suspicious numbers and allowing owners and executives to monitor the trends of inventory shrinkage and financial inconsistences across all of their locations.
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