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How does a POS (Point of Sale) system work?

A Point of Sale (POS) System
(Image credit: Pixabay)

POS (or Point of Sale) systems are critical pieces of IT infrastructure for businesses that take payments of any kind. They have evolved greatly since the first electronic version was released by IBM in the 1970s.

Today, some of the best POS systems are available in miniature packages – from slim eye-catching terminals to smartphones and tablets – that are far easier to operate than the large countertop cash registers of old.

At the same time, more technologies have converged into POS terminals than ever before, meaning that a single device can do everything from inventory tracking and ERP to managing staff time and attendance – so at the same time there can be many added layers of complexity.

Note that a POS system is not a standalone process. It is a myriad of connected and integrated technologies that combine hardware and software to represent a whole checkout system. Generally, it will be made up of a computer monitor or tablet (or smartphone) screen that runs software directly from an integrated computer located on-site, or one located elsewhere (e.g. in the cloud).

Hardware and software setup

How to install a POS system depends on whether you are using a traditional software model, or are running software hosted in the cloud. On-premise software is installed to a main PC, which is then connected to various terminals located around a business’s store. It usually comes on a disc (for businesses in areas of poor connectivity) or can be downloaded from the internet. 

Once the software has been installed, you can then connect any hardware – from credit card processing machines to other point-of-sale terminals, barcode readers, printers, and more.

For this type of set up, you will be required to purchase one or more software licenses for terminals, and you will need to maintain and manually update the software. One advantage is that, because the software is running on your immediate computer network, you do not require the internet unless you are taking advantage of other connectivity-dependent features.

If you are running your POS system from the cloud, all the system data is hosted online on your POS provider’s internet servers. This brings the advantage of allowing you to access your business data from any computer browser or internet-connected device. It also means that your software is automatically maintained and updated by your POS provider – so long as you’re always using the latest version of the POS application.

Processing transactions

We are living in an increasingly cashless society, so the ability to process credit and debit card payments is vital. There are generally two options to achieve this – via manual entry or through an automatically linked-up system. 

Both require a mobile card reader of some sort – the type which are offered by mobile POS vendors such as Square and iZettle. Whatever type of terminal you are using, it will need to connect to the internet via a phone line, through a built-in SIM card, or over Wi-Fi.

When it comes to the terminal itself, there are standalone and integrated variants. The former, as its name suggests, does not communicate with the rest of your POS system. When a customer comes to the terminal to buy goods, you will need to add up the cost of all of the items on the screen or on the cash register, before entering the total amount on your card machine's keypad. The terminal will then connect with the card issuer and bank to approve the transaction before printing a receipt and displaying a confirmation message.

The process would be similar for a small business using a cloud-based POS application on an iPad connected to a Bluetooth connected compact card reader. The set up can be simplified if a cash drawer is not needed, as receipts for card transactions can be sent via email or text to customers.

If the business does not have a quality internet connection, it can alternatively use a local hosted POS. One drawback there is that equipment is usually bulky and requires professional installation – and it may only be made available on a contract. On the other hand, a more complex system is likely to possess more in-depth functionality that small card readers do not – from inventory libraries to keep track of stock levels, to hardware tools like scales, barcode scanners, and other devices for taking off security tags.

Inputting data and inventory management

When a POS system has been set up, it’s ready for data entry and inputting information for transactions and on customers. This can be a time-consuming task, and in many cases POS terminals require the same information to be entered about customers and products many times. To save time and effort, look for a POS system that allows customer names and historical transactions to be easily retrieved from a touchscreen interface.

Then you need to think about inventory management, which allows you to know which items and products you have available for customers to buy and which ones have nearly run out. This can save businesses valuable time, energy and money in knowing what items they need to replenish before they run out. It is essential that a business uses an inventory management system that is not overly complex for its employees to get to grips with. Many allow thousands of items to be stored and retrieved at the touch of a few buttons, in addition to issuing real-time monitoring and low stock alerts at the appropriate time.

Reporting

With a cloud-based POS it is possible to easily generate financial reports for sending to accounting software or accountants who are manually organizing end-of-the-day banking activities. There are several components to reporting – starting with sales reports that are useful for determining which items are most popular and selling the fastest; conversely, it will alert you to those that aren’t selling so well, enabling you to take action.

Additionally, you will need to undertake payment reporting to see if the business is performing well in terms of cash flow. And finally, employee reports are necessary to help identify how well your workers are performing.