INVENTORY
The verb “inventory” refers to the act of counting or listing items. As an accounting term, inventory is a current asset and refers to all stock in the various production stages.
They are the goods and materials that a business holds for the ultimate goal of resale, production or utilization. It is the largest current assets held by most businesses.
INVENTORY MANAGEMENT
Inventory management is the act of keeping stock which involves the process of:
Ordering
Storing
Using
Selling a company’s inventory, including raw materials, components, and finished products. It also includes warehousing and processing of these items.
Inventory analysis is the study of how product demand changes over time and it helps businesses stock the right amount of goods and project how much customers will want in the future.
A well-known method for performing inventory analysis is ABC analysis. To perform an ABC analysis, group goods into three categories:
- A inventory: A inventory includes the best-selling products that require the least space and cost to store. Many experts say this represents about 20% of your inventory.
- B inventory: B items move at a similar rate to A items but cost more to store. Generally, this represents about 40% of your inventory.
- C inventory: The remainder of your stock costs the most to store and returns the lowest profits. C inventory represents the other 40% of your inventory.
FIFO and LIFO
FIFO and LIFO accounting are methods used in managing inventory management.
FIFO” stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first (but this does not necessarily mean that the exact oldest physical object has been tracked and sold). In other words, the cost associated with the inventory that was purchased first is the cost expensed first.
“LIFO” stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first.
Benefits of Inventory Management/Analysis
- Inventory analysis raises profits by lowering costs and supporting turnover. It also:
- Improves Cash Flow: Inventory analysis helps you identify and reorder items you sell often, so you don’t spend money on inventory that moves slowly.
- Reduces Stockouts: When you understand which inventory customers want most, you can better anticipate demand and prevent stockouts.
- Increases Customer Satisfaction: Analyzing inventory offers insight into what and how customers purchase goods.
- Reduces Wasted Inventory: Understanding what, when and how much people buy minimizes the need to store obsolete products, as well as when products expire so you can have a strategy behind using them.
- Reduces Project Delays: Learning about supplier lead times helps you understand when to reorder and how to avoid late shipments.
- Improves Pricing From Suppliers and Vendors: Inventory analysis can lead you to order high volumes of products regularly rather than small volumes on a less reliable schedule. This regularity can put you in a stronger position to negotiate discounts with suppliers.
- Expands Your Understanding of the Business: Reviewing inventory provides insights into your stock, customers and business.
