Business inventory refers to the raw materials, work-in-progress, and finished goods that a company holds for the purpose of selling or producing goods and services. Inventory is a critical asset for many businesses, allowing them to meet customer demand and grow their sales. But how does this work?
In this article, we will go over what a business inventory is and how it works.
What is Business inventory?
Business inventory enables you to ensure product availability and reduce production costs by tracking your items’ purchase, storage, and sale at every stage. It aids companies in keeping track of their stock levels so they can decide when and how much to create.
Business inventory is an economic indicator that looks at the overall amount of inventory at each of the three stages of production:
- Manufacturing,
- Wholesale and
- Retail.
The inventory report also lists the business sales and the total sales at the three output stages.
Inventory and sales for a business are reported in dollars for the reporting period, but investors and experts tend to focus on the per cent changes from month to month and from month to year.
Why are Inventory Counts Important for a business?
Economists, investors, analysts, and organizations like the Federal Reserve, institutional investment companies, and banks use the data to study and predict how the economy will change. Business inventories are a leading indicator of what the manufacturing sector will do in the future and how customers might spend their money.
High inventory levels, for example, can be seen as either a sign that manufacturers are making more goods and have enough to meet expected demand or that customer demand is low and too many goods are going unsold. This could be a sign that the economy is getting worse.
Point-of-Sale Systems for Managing Inventories
Numerous POS systems on the list below may assist with bookkeeping, staff time monitoring, customer loyalty programs, inventory tracking, and helping businesses keep track of their stock.
NerdWallet recommends the following POS systems, all of which provide tools for inventory management:
#1. Square
One of the most popular point-of-sale systems for small businesses is Square. It can track inventory based on sales and generate SKUs automatically. Square provides systems tailored to the restaurant, retail, and appointment-focused industries.
A typical POS system to serve the requirements of other kinds of small enterprises.
Toast, mostly used by food service companies, may produce inventory reports and identify underwhelming goods. Additionally, it may digitally map your inventory plan to match the kitchen in your company.
#2. Lightspeed
Among POS systems, Lightspeed has one of the best inventory management products. Thanks to a comprehensive inventory management system that tracks product availability across various locations, users can create automatic reorder points to ensure they never run out of products.
#3. Shopify
Users of Shopify, a well-liked point-of-sale system for online retailers, may check their current inventory, automatically change inventory levels, and get alerts when it’s time to acquire more of a certain item.
Types of Business Inventory
Regarding supply and demand, business owners and managers need to know about different kinds of goods. Knowing about these different kinds of inventory, you can better handle, plan, and budget. Then, you’ll be able to meet customer needs and do well in the market.
#1. Materials
Every business needs raw materials to keep going. They are made of the same materials your business uses to make its products. For example, if you run a lemonade service, you need water, sugar, and lemons. You can’t make the drink you market and sell without these raw products. If you have lemonade, your customers will be happy (and no longer thirsty).
If your business doesn’t have a way to keep track of its raw material supplies, you can’t predict what it will make in the next quarter or year.
#2. Work-in-Progress (WIP)
Work-in-progress (WIP) is made up of all the parts of a system that are being worked on. WIP is generally made up of raw materials sent out to be processed for the first time. It also includes the whole process of making a movie. Say, for example, that you own a business that fixes cars. Your WIP would include brake pads.
#3. Finished Goods
As you might have guessed, finished goods inventory includes all finished items ready to be marketed and sold. For example, if your food business sells pre-packaged ice cream cones, the cones in their boxes would be considered finished goods.
#4. Packing Materials
As the name suggests, packing material is what you keep on hand to pack and ship your finished goods. Most packing materials fall into one of these three groups:
The primary packing material is the box, bag, or other material that holds your product while it’s on display in a store. If your business makes laundry soap, the box or bottle customers take off the grocery store shelf is your main packaging type.
The second packing material you use is the box, bag, or other material to store and transport your goods. Keeping with the laundry detergent example, the big box that holds four bottles of your product for bulk storage and shipping to retail stores is the second type of packaging.
#5. Safety Stock
With good monitoring, tracking, and control, you can set aside certain types of inventory to protect against uncertain supply and demand, low delivery dependability, and low-quality components. This extra stock is called safety stock (or buffer stock).
The amount of product you keep on hand that is more than what your business needs to meet normal demand is called “safety stock.”
Having a safety stock can help you avoid:
- Stock-outs happen when an order can’t be met with what’s already in stock.
- Waiting lists
- Putting the customer on hold until the next run of production
- Causing the customer to look for the goods somewhere else
#6. Snoothing Inventory
Smoothing inventory, also called “anticipation inventory,” is a type of inventory in which a company buys and stores more goods or supplies than it needs right now in preparation for something that will happen in the future.
Businesses do this because it “smooths out” the peaks and dips of demand that change with the seasons and lets them keep their output the same. How does it work?
In the months before the start of a new school year, when demand is at its peak, a pen maker will stock up on parts, materials, and finished pens. Then, when it’s time for kids to return to school, the maker slowly gets rid of the extra stock without having to speed up production.
#7. Break Down
In an industrial setting, machines rarely all work at the same speed. In the production chain, one or two pieces of equipment may run several times faster than the pieces that come before or after them. Machines sometimes break down so that they can be fixed or maintained.
Even though activity and production times are different, makers can keep the flow going by decoupling inventory in stock.
#8. Decoupling inventory
Parts, supplies, and finished goods that are awaiting use by the following machine in the chain make up the decoupling inventory. Consider it a shock absorber that prevents variations in run times, machine breakdowns, and repairs from disrupting the manufacturing process.
This kind of inventory makes it less important for the business to follow the order of the production line, so Machine B doesn’t have to wait for Machine A to finish before it can start. Even if Machine A is down for repairs, the person in charge of Machine B can still pull parts from the disconnected stock.
#9. EOQ
The economic order quantity theory (EOQ) leads to cycle inventory. EOQ tries to keep stocking costs and machine setup costs in balance.
On the other hand, when your business buys a small number of parts for multiple small manufacturing runs, inventory costs go down, but machine setup costs go up (because you have to change the machine for each run).
#10. MRO Goods
MRO goods, or maintenance, repair, and operating supplies, are used to keep jobs in the production process going. Most of the time, these things are a big part of the production process but are not part of the finished product.
All MRO goods are gloves, packing materials, tools, etc. Office supplies like staplers, pens and pencils, copier paper, and toner are called MRO goods inventory. These are all the small parts that keep the machine running.
Techniques and Best Practices for Small Business Inventory Management
Here are a few methods for managing inventories that many small businesses employ.
#1. Develop Your Predicting Skills
Forecasting correctly is essential. Your expected sales projections should be based on elements like past sales data (if you use Square, check your online Dashboard for this information), market trends, projected growth and the state of the economy, promotions, marketing initiatives, etc.
#2. Use the First-in, First-Out (FIFO) Strategy
This is crucial for perishable items like food, flowers, and cosmetics. For instance, a bar owner needs to know the supplies behind the counter and use FIFO techniques to increase bar inventory. Nonperishable goods should do the same since items left out for too long may deteriorate or become out-of-date and unsellable. In a storeroom or warehouse, the easiest approach to implementing FIFO is to add new goods from the back so that the older products are at the front.
#3. Find Stocks With Low Turn
It’s usually time to quit stocking an item if none of your stock has sold in the past six to twelve months. Since extra stock consumes space and money, you may want to think about other methods of getting rid of it, such as a special discount or promotion
#4. .Check Your Inventory
Even with good inventory management software, you need to occasionally physically count your stock to ensure that what you have matches what you thought you had. Businesses employ various methods, such as a yearly, year-end physical inventory that counts every item and regular spot-checking, which can be especially helpful for products moving quickly or with stocking concerns.
#5. Utilize Inventory Management Software on the Cloud
Software offering real-time sales analytics should be sought out. Your stock levels are immediately changed each time you make a sale, thanks to Square’s software’s direct connection to your point of sale. Receive daily stock alert emails to know when products are running low or out of stock so you can place an order more quickly.
#6. Monitor the Status of Your Stock at all Times
Establish a reliable strategy for keeping track of your inventory, giving priority to the most valuable items. By handling many labor-intensive tasks, efficient software helps you save time and money.
#7. Speed Up Equipment Repairs
Managing those assets is crucial because critical equipment isn’t always in working order. An expensive machine can break down. Understanding the life cycle of your machinery and its components is essential if you want to be ready when problems occur.
#8. Don’t Overlook Quality Assurance
It’s crucial to ensure that all of your items look fantastic and function properly, regardless of your area of expertise. Employees could simply be asked to do a brief inspection during stock audits, including a checklist for visible signs of damage and accurate product labeling.
#9. Employ a Stock Manager
Stock control, which includes everything from raw materials to finished goods, is used to demonstrate how much inventory you have on hand at any given time. One person may need to be in charge of your inventory if you have a lot of it. All purchase orders are processed by a stock controller, who also receives deliveries and ensures that everything arrives in line with what was bought.
#10. Keep Your ABCs in Mind
Grouping inventory products into A, B, and C categories allows many organizations to have tighter control over higher-value commodities.
#11. Think About Dropshipping
You can sell things without keeping any inventory yourself if your company uses drop-shipping techniques. Instead, when a customer purchases from your store, a wholesaler or manufacturer maintains the inventory and sends the goods. In this manner, you are free from concern with inventory holding, storage, or fulfillment. Drop shipping is a popular choice among new online store owners, but companies in all sectors of the economy can use this supply chain approach.
Do small businesses need to do inventory?
The operation and success of your firm depend on effective inventory management. Counting your things, setting up your floor, and increasing employee productivity and efficiency will all benefit from system organization. Accurate counting results in more disparities and a higher profit margin for your company.
How do I create an inventory list for my business?
An inventory manager must physically count each item in stock before recording the data on a form or template they design or download to manually generate an inventory list. The list must be updated regularly to reflect how frequently inventory levels vary to produce the most accurate results.
Is inventory an asset or an expense?
Key takeaways for the present asset The products on hand for sale and the raw materials required to make those products are considered inventory. On the balance sheet of an organization, it is categorized as a current asset.
How do I calculate inventory?
According to the basic formula, beginning inventory plus net purchases minus COGS equals ending inventory. The ending inventory of the previous period is your starting inventory.
Why does a business hold inventory?
In terms of maintaining inventory, the main goal is to make sure that customer service standards can always be satisfied without endangering cash flow or running out of stock. Customers frequently stop being customers when they can’t buy what they need when they need it.
Conclusion
Last but not least, effective inventory management can enhance your customer service. This is crucial since it may encourage more customers to make repeat purchases from you and spread the word to their social networks about their excellent experiences.
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