Intangible or tangible, every business deals with the kind of product they sell. Sometimes it may come in the form of what is used in rendering services to customers. Whichever way, there is an item you offer as a business.
Inventory is directly related to businesses that deal with tangible products stored to be sold later. It is convenient to switch stock for inventory and inventory for stock. Let’s see what inventory is in this blog post and why it is a vital part of any business.
What Is an Inventory?
Inventory refers to the goods or materials a business holds in stock for selling or using in daily business operations. In other words, every business deals with either tangible or intangible inventories. Inventory can include raw materials, work-in-progress, finished goods, and office supplies.
Why Is Inventory Important?
It is important to keep an inventory record as a business because it helps you know how well you can meet customers’ demands and ensure that products can be made available when customers need to purchase them.
Having enough products in your inventory can increase sales and boost customer satisfaction. And you know that the more items you sell as a business determine how much profit you will make.
Stockouts can also be avoided by businesses when they keep an inventory. Inventory serves as a backup for when the items on the shelve are sold out. When you do not have supplies in your inventory, it leads to stockouts and loss of sales, dissatisfied customers. Good inventory management minimizes the risk of running out of stock and ensures a smooth business flow.
When there are seasonal demands, inventory is what you can rely on to meet the rising demands of your customers. Throughout the year, there are several events or trends that can cause demand changes. There are times when businesses need to sell more goods and services, but there may be times when demands are low during other sales periods. Whichever way, they get the chance to either up demand or save excess not bought.
Even with all these benefits, holding excessive inventory can stifle an organization’s capital, which is not so desirable. So, not to tie your capital to inventory, you should understand the market for your products to know how much you need to keep in your inventory.
Knowing the demand behavior of your customers can help you know how many products you need to keep in inventory so that you can meet the exact demand. If excessive inventory holds capital down, having too little inventory can result in frequent reordering and administrative costs. Maintaining the right inventory level can beat down the cost of shipping or stocking inventory.
Inventory VS Stock
There is a lot of similarity between the definitions of these two accounting or business terms. Inventory and stock are closely knit.
Inventory consists of every material or product a business uses for production to sell later or use for production. Inventory is a broader term compared to stock that deals with finished products only.
In a business, stock refers to ready-to-sell items. In other words, stock is a subset of inventory. While inventory covers all product supplies, stock only covers products ready for immediate sale.
Types Of Inventory
1. Raw Materials
Raw materials are the basic materials or components used in the production process. They are usually acquired from suppliers and are used to create finished products. Examples include wood, steel, fabric, chemicals, or any other materials required for manufacturing.
2. Work-in-Progress (WIP)
Work-in-progress inventory represents products that are currently in the production process but not yet completed. These are partially finished goods that are still undergoing various stages of manufacturing or assembly.
3. Finished Goods
Finished goods inventory refers to the final, completed products that are ready for sale to customers. These are the end products that have undergone all production and quality control processes and are waiting for customer orders or distribution.
4. Maintenance, Repair, and Operations (MRO) Inventory
MRO inventory includes the supplies and materials necessary for the day-to-day operations and maintenance of a business. It includes items such as spare parts, tools, cleaning supplies, lubricants, and other consumables required to keep machinery, equipment, and facilities operational.
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5. Merchandise Inventory
Merchandise inventory is relevant to retail businesses. It consists of finished goods or products that are purchased from suppliers for resale to customers. Retailers stock various items, such as apparel, electronics, household goods, or any other products they offer in their stores.
6. Consignment Inventory
Consignment inventory is owned by a supplier or manufacturer but is held by a retailer or consignee. The consignee has the products in their possession and will only pay the supplier when the products are sold to the end customer. This arrangement helps mitigate risks for the consignee, as they don’t pay for the inventory until it is sold.
7. Safety Stock
Safety stock is a buffer inventory maintained to protect against unexpected events such as sudden increases in demand, supply chain disruptions, or delays. It acts as a cushion to ensure that there is enough inventory on hand to meet customer needs during unforeseen circumstances.
8. Obsolete or Excess Inventory
Obsolete or excess inventory refers to items that are no longer in demand or are no longer usable by the business. It could be due to product discontinuation, changes in market trends, or expiration dates. Managing and minimizing obsolete inventory is crucial to avoid tying up capital and storage space unnecessarily.
Wrap
Knowing how important and valuable an inventory is to a small business can help you dodge some challenges and stay on the good side of profit. A good and well-monitored inventory saves the day when you have high demands from buyers. It is also a crucial part of your accounting audit that you need to keep in check.
