Business inventory management is an important asset for organizations since it allows them to reduce the cost of inventory on their balance sheet when they receive these goods. Materials, work-in-progress, and finished goods are the three types of inventory.
What is Inventory?
Inventory is the accounting of items, component components, and raw materials that a business consumes or sells. You perform inventory management as a business leader to ensure that you have enough merchandise on hand and to identify when there is a shortfall.
The act of counting or listing objects is referred to as inventory. Inventory is a phrase used in accounting to describe all goods in various stages of manufacturing and is a current asset. Both shops and manufacturers can continue to sell or develop things if they keep stock. For most businesses, inventory is a big asset on the balance sheet; nevertheless, too much inventory can become a practical problem.
What is Included in a Business Inventory?
An inventory is simple for small business owners. It’s basically a complete list of all the physical assets on which your business runs. Here are several examples:
- The structure in which you conduct your business
- Furniture, computers, and phone systems are examples of office equipment that can be owned or leased.
- Accounting data, business records, and other documentation
- Commercial cookware, machinery, and 3D printers are examples of specialty equipment.
- Inventory and other supplies for businesses
- Signs, satellite dishes, security cameras, and fences.
Types of Business Inventory
Raw materials are the materials that a company employs to develop and finish products. When the product is finished, the raw components, such as shampoo oil, are often indistinguishable from their original form.
#1. Components:
Components are similar to raw materials in that they are the materials used by a company to build and finish items, but they are recognizable when the product is finished, such as a screw.
WIP inventory refers to goods in production such as raw materials or components, labor, overhead, and even packing materials.
#2. Finished Goods:
Items that are ready for sale are referred to as finished goods.
#3. MRO (Maintenance, Repair, and Operations) Goods:
MRO is inventory — generally in the form of supplies — that aids in the production of a product or the operation of a business.
#4. Packing and Packaging Materials
Packing and packaging materials are classified into three types. Primary packaging protects and makes the product useful. Secondary packaging is final product packaging that may include labels or SKU information. Tertiary packaging is bulk transport packaging.
#5. Anticipation stock and safety stock:
Safety stock is excess inventory purchased and stored by a corporation to cover unexpected situations. Although safety stock has carrying expenses, it contributes to consumer happiness. Similarly, anticipation stock is made up of raw materials or completed goods that a business buys depending on trends in sales and manufacturing. A business may purchase safety stock if the price of raw materials rises or the peak selling season approaches.
#6. Decoupling Inventory:
Decoupling inventory refers to additional items or work in progress (WIP) held at each production line station to avoid work stoppages. While all businesses may maintain safety stock, decoupling inventory is beneficial if various segments of the line operate at different speeds and are only applicable to businesses that make things.
#7. Cycle Inventory:
Businesses order cycle inventory in lots to ensure that they have the proper amount of stock at the lowest possible storage cost. The “Essential Guide to Inventory Planning” contains more information about cycle inventory calculations.
#8. Services Inventory:
The amount of service a business may supply in a given period is referred to as service inventory, a term in management accounting. A hotel with ten rooms, for example, has a weekly service inventory of 70 one-night stays.
#9. Transit Inventory:
Transit inventory, also known as pipeline inventory, is stock that moves between the manufacturer, warehouses, and distribution centers. It may take weeks for transit inventory to move between facilities.
#10. Theoretical Inventory:
Also known as book inventory, theoretical inventory is the smallest amount of stock required by a corporation to perform a task without having to wait. Theoretical inventory is largely utilized in manufacturing and the food business. The real versus theoretical formula is used to calculate it.
#11. Excess Inventory:
Excess inventory, also known as obsolete inventory, is unsold or unused commodities or raw materials that a corporation does not anticipate using or selling but must pay to hold.
Examples Of Business Inventory
Real-world examples can help business inventory models become more understandable. The examples below show how various forms of inventory work in retail and manufacturing businesses.
#1. Ingredients/raw materials:
A company that makes T-shirts has components that include fabric, thread, dyes, and print designs.
#2. Finished Products:
Charm necklaces are made by a jewelry company. To make a finished object suitable for sale, staff connects a necklace to a preprinted card and slides it into cellophane envelopes. The finished good’s cost of goods sold (COGS) comprises both its packaging and the labor required to create the item.
#3. Work in Progress:
A cell phone is made up of a casing, a printed circuit board, and many components. WIP refers to the process of assembling the pieces at a dedicated workstation.
#4. MRO Supplies:
Copy paper, folders, printer toner, gloves, glass cleaner, and brooms for sweeping up the grounds are examples of maintenance, repair, and operational supplies for a condominium community.
#5. Packing Materials:
The primary packing material for a seed company is the sealed bag containing, for example, flax seeds. Secondary packaging consists of placing the flax seed bags in a box for transportation and storage. Tertiary packing is the shrink wrap necessary to ship product cases on pallets.
#6. Safety Stock
A veterinarian in remote village stocks up on disinfectant and dog and cat treats to fulfill consumer demand if the roadway floods during the spring thaw and causes supply trucks to be delayed.
#7. Anticipated/Smoothing Inventory:
In preparation for the June wedding season, an event planner purchases inexpensive spools of ribbon and floral tablecloths.
#8. Decoupled Inventory:
In a bakery, the decorators preserve a stock of sugar roses to garnish wedding cakes, so that even if the ornament team’s supply of frosting mix is late, the decorators can continue to work. Because the flowers are part of the cake’s design, the baker would be unable to provide a finished cake if they ran out of them.
#9. Cycle Inventory:
As a restaurant uses its last 500 paper napkins, a fresh refill order arrives. The napkins neatly fit into the designated storage place.
#10. Service Inventory:
A café is open 12 hours a day, has ten tables, and diners spend an average of one hour eating their meals. As a result, its service inventory is 120 dinners every day.
#11. Theoretical Inventory Cost:
A restaurant intends to spend 30% of its budget on food but finds that it actually spends 34% of its budget. The “theoretical inventory” represents the 4% of food lost or wasted.
The theoretical inventory of stock in the inventory record or system may differ from the actual inventory when a count is performed.
#12. Transport Inventory:
A popular pencil set is ordered and paid for by an art store. The tins are on their way from the supplier and so in transit.
#13. Surplus Inventory:
A shampoo firm makes 50,000 special shampoo bottles branded for the summer Olympics, but only sells 45,000 of them before the Olympics are over – no one wants to buy them, so they must discount or discard them.
What Effect Does Business Inventory Have on the Stock and Bond Markets?
High values in business inventory could indicate that firms are performing well in terms of production. On the other hand, high inventory levels for an extended period may indicate that consumer demand is weak and that the economy is about to enter a recession. Stock values, particularly for companies engaged in manufacturing, may fall in response to this circumstance. Bond prices may also decline if business inventories indicate that the economy is about to contract.
Techniques for Inventory Management and Best Practices for Small Businesses
Following are some inventory management approaches used by numerous small businesses:
#1. Improve your predictions.
Forecasting accuracy is critical. Your estimated sales statistics should be based on elements such as historical sales figures (if you sell using Square, look for this information in your online Dashboard), market trends, predicted growth and the economy, promotions, marketing activities, and so forth.
#2. Employ the FIFO method (first in, first out).
Items should be sold in the same order in which they were purchased or generated. This is especially true for perishable items such as food, flowers, and makeup. For example, a bar owner must be aware of the items behind the bar and use FIFO practices to increase bar inventory. It’s also a good idea for nonperishable goods, because anything that lies around for too long may get damaged, out of date, and unsellable. In storage or warehouse, the best approach to employ FIFO is to add new goods from the back so that older products are at the front.
#3. Determine low-turn stock.
If an item hasn’t sold in the last six to twelve months, it’s generally time to discontinue stocking it. You should also think of other ways to get rid of that product, such as a special price or promotion because surplus stock wastes both space and money.
#4. Examine your inventory.
Even if you have strong inventory management software, you should still count your inventory on a regular basis to ensure that what you have in stock matches what you think you have. Companies employ several strategies, such as an annual, year-end physical inventory that counts every single item and regular spot-checking, which is especially effective for products that move quickly or have stocking concerns.
#5. Employ inventory management software that is cloud-based.
Seek software that provides real-time sales analytics. Get daily stock alert emails to keep track of whether items are running low or out of stock so you can order more in time.
#6. Always keep an eye on your supply levels.
Establish a strong system for managing stock levels and prioritizing the most expensive products. By doing much of the heavy lifting for you, effective software saves you time and money.
#7. Decrease the time it takes to repair equipment.
Because critical machinery is not always in working order, it is critical to managing those assets. A broken piece of machinery can be very expensive. Monitoring your machinery and its parts is essential for understanding its life cycle and being prepared before problems develop.
#8. Don’t forget about quality assurance.
Whatever your specialty, it’s critical that all of your items look excellent and function properly. It might be as simple as having personnel perform a fast inspection during stock audits, which includes a checklist for symptoms of damage and proper product labeling.
#9. Employ a stock controller.
Stock control, which applies to all things from raw materials to finished goods, is used to demonstrate the quantity of inventory you have at any one time. If you have a large inventory, you may require one person to be in charge of it. A stock controller processes all purchase orders receive deliveries, and ensures that everything that arrives corresponds to what was ordered.
#10. Recall your ABCs.
Many organizations find that categorizing inventory products into A, B, and C categories help them maintain tighter controls over higher-value commodities.
#11. Take into account drop shipping.
You can sell things without actually owning the inventory yourself if your business uses drop shipping techniques. When a customer purchases from your store, a wholesaler or manufacturer is responsible for carrying the inventory and transporting the products. You won’t have to bother about inventory holding, storage, or fulfillment. Many online store owners use drop shipping methods, however, this supply chain fulfillment strategy may be used by a wide range of firms across all industries.
The Importance of Business Inventory
In the study and forecasting of future economic conditions, economists, investors, and analysts, as well as institutions ranging from the Federal Reserve to institutional investment firms and banks, rely heavily on the data. Business inventories are regarded as a leading indicator for predicting future production commitments and consumer spending.
High inventory levels, for example, can mean one of two things: manufacturers are producing more and have enough goods to fulfill predicted demand, or consumer demand is weak and there are too many goods being left unsold. The latter could indicate the onset of a recession.
In either case, it’s a means to predict consumer spending and confidence, much like retail sales, same-store sales, and vehicle sales.
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