Inventory management is a crucial asset for businesses as it enables them to minimize the cost of inventory on a company’s balance sheet when they receive these goods. Inventory can be classified in three ways, including materials, work-in-progress, and finished goods. Show
What Is Inventory?Inventory is the accounting of items, component parts and raw materials that a company either uses in production or sells. As a business leader, you practice inventory management in order to ensure that you have enough stock on hand and to identify when there’s a shortage. 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. By keeping stock, both retailers and manufacturers can continue to sell or build items. Inventory is a major asset on the balance sheet for most companies, however, too much inventory can become a practical liability. Video: What Is Inventory?
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Inventory ExplainedAn organization’s inventory, which is often described as the step between manufacturing and order fulfillment, is central to all its business operations as it often serves as a primary source of revenue generation. Although inventory can be described and classified in numerous ways, it’s ultimately its management that directly affects an organization’s order fulfillment capabilities. For example, in keeping track of raw materials, safety stock, finished goods or even packing materials, businesses are collecting crucial data that influences their future purchasing and fulfillment operations. Understanding purchasing trends and the rates at which items sell determines how often companies need to restock inventory and which items are prioritized for re-purchase. Having this information on hand can improve customer relations, cash flow and profitability while also decreasing the amount of money lost to wasted inventory, stockouts and re-stocking delays. 13 Types of Inventory
Inventory is known as being a company’s goods and products that can be sold. It is labeled as being the current asset on a company’s balance sheet. The intermediary between manufacturing and order fulfillment. Inventory ExamplesReal-world examples can make inventory models easier to understand. The following examples demonstrate how the different types of inventory work in retail and manufacturing businesses.
What Is Manufacturing Inventory?In manufacturing, inventory consists of in-stock items, raw materials and the components used to make goods. Manufacturers closely track inventory levels to ensure there isn’t a shortage that could stop work. Accounting divides manufacturing stock into raw materials, WIP and finished goods because each type of inventory bears a different cost. Raw materials typically cost less per unit than do finished items. What Does Inventory Mean in the Service Industry?Every company has stock that supports its regular business. For service companies, this inventory is intangible. A law firm’s inventory, for example, includes its files, while paper on which to print legal documents is the firm’s MRO. The Importance of Inventory ControlInventory control helps companies buy the right amount of inventory at the right time. Also known as stock control, this process helps optimize inventory levels, reduces storage costs and prevents stockouts. Inventory control empowers companies to collect the maximum amount of profit. It enables them to minimize the investment made in stock, allowing companies to best evaluate their ongoing assets, account balances, and financial reports. It is important because it prevents exuberant costs because of purchasing too much or inessential inventory, rather prioritizing the obligatory inventory. With the appropriate internal and production controls, the practice ensures the company can meet customer demand and delivers financial elasticity. Inventory control enables the maximum amount of profit from the least amount of investment in stock without affecting customer satisfaction. Done right, it allows companies to assess their current state concerning assets, account balances and financial reports. Find out more in the “Essential Guide to Inventory Control.” Inventory Best PracticesThe business saying “if you can’t measure it, you can’t manage it” applies to inventory management and best practices. While the first best practice is keeping track of your inventory, others include:
Inventory management is critical in strengthening companies supply chain because it helps to stabilize the dynamics between customer demand, storage space, and cash restraints. What Is Inventory Process?An inventory process tracks inventory as companies receive, store, manage and withdraw or consume it as work in progress. Essentially, the inventory process is the lifecycle of goods and raw materials. See a diagram of the inventory process flow and learn more by reading “The Essential Guide to Inventory Planning.” What Is Inventory Count?An inventory count is the physical act of counting and checking the condition of items in storage or a warehouse. An inventory count also checks the condition of items. For accounting purposes, inventory counts help assess assets and debts. Inventory counts help you understand which stock is moving well and inventory managers often use this information to forecast stock needs and manage budgets. To learn more about inventory counting, read the articles “Taking Physical Inventory” and “Cycle Counting 101.” Methods of Recording of InventoryThe two methods of recording inventory are periodic and perpetual. In periodic inventory, you count stock at specific times and add the totals to the general ledger. In the perpetual method, you record changes in stock as they occur. Although any type of business can use periodic inventory, small organizations frequently use it, especially when there are no plans to scale the business. The periodic method requires no special software or equipment. Organizations that use perpetual inventory recording methods and require real-time counting often use scanners and point-of-sale (POS). What Is Inventory Turnover?Inventory turnover is the number of times a company sells or uses an item in a specific timeframe, which can reveal whether a company has too much inventory on hand. To determine inventory turnover, use the following equations: Average inventory = (Beginning Inventory + Ending Inventory) / 2 Inventory turnover = Sales + Average Inventory To learn more about inventory turnover, read “Inventory Turnover Primer: Calculations, Rates and Analyses.” What Is Inventory Analysis?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:
ABC analysis leverages the Pareto, or 80/20, principle and should reveal the 20% of your inventory that garners 80% of your profits. A company will want to focus on these items to increase sales and net profit margins. Inventory analysis may influence the choice of inventory control methods, whether just-in-time or just-in-case. Benefits of Inventory AnalysisInventory analysis raises profits by lowering costs and supporting turnover. It also:
What Is Demand Forecasting?Demand forecasting is the practice of predicting customer demand by looking at past buying trends, such as promotions and seasonality. Accurately predicting demand provides a better understanding of how much inventory you’ll need and reduces the need to store surplus stock. Inventory forecasting relies on data to inform decisions, applying information and logic to guarantee you’ve got enough product on hand to meet demand while not tying up cash with unnecessary inventory. There are a number of advanced simulations used, but it typically comes in the form of trend forecasting, graphical forecasting, qualitative forecasting, or quantitative forecasting. Benefits of Inventory Management and Accurate InventoryA good inventory management strategy and accurate inventory counts can help save companies money because they’ll only provide items that customers buy and therefore, simplify their operations. Read about more benefits in the article “Top Inventory Management Benefits.” Accounting for InventoryAccounting for inventory is the system that counts and records changes in the value of stock such as raw materials, WIP and finished goods, which are all considered assets. Financial accounting for inventory provides an accurate valuation of these stock assets. Inventory accounting determines the value for stock items and the correct item count. These figures establish the costs of goods sold and the ending inventory value, which factor into the company’s overall value. What Is Average Inventory Cost?The average cost of inventory is a method for calculating the per-unit cost of goods sold. To calculate the average cost, get the sum of the cost of all stock for sale, and divide it by the number of items sold. This method is also called weighted average cost, and is a valuable way to determine the value of your current inventory. It works best for brands that have high volumes of inventory and SKUs that are similar in cost. One of its benefits over other methods is that it makes it easier to track and consistently calculate inventory value by using a blended average. However, there’s a lot more to managing inventory and keeping financial statements than simply tracking inventory value. Learn more about average inventory cost in the article “The Key to Using Inventory Cost Accounting Methods in Your Business.” NetSuite Software for Managing All Your Inventory NeedsProperly managing inventory can make or break a business. Having insight into your stock at any given moment is critical to success. Decision makers know they need the right tools in place to be able to manage their inventory effectively. NetSuite offers a suite of native tools for tracking inventory in multiple locations, determining reorder points and managing safety stock and cycle counts. Find the right balance between demand and supply across your entire organization with the demand planning and distribution requirements planning features. NetSuite provides cloud inventory management solutions that are the perfect fit for companies within the startup to small businesses to Fortune 100 range. Learn more about how you can use NetSuite to help plan and manage inventory, reduce handling costs and increase cash flow. Inventory FAQsWhat are the four different inventory types?There are four main types of inventory: raw materials/components, WIP, finished goods and MRO. However, some people recognize only three types of inventory, leaving out MRO. Understanding the different types of inventory is essential for making sound financial and production planning choices. How is inventory controlled?Inventory control — or stock control — is making sure that your business has the right supply of inventory to meet customer demand. This usually requires inventory management software and supply chain management (SCM) software that brings in data from purchases, shipping, warehousing, reorders, receiving, storage, loss prevention, and even customer satisfaction. What is an inventory record?An inventory record, or stock record, contains data about the items a company has in stock, such as the amount of inventory on hand, what’s been sold and reordered, what’s on order, the product’s value, and where it’s stored. It’s important to keep accurate inventory records to assist with inventory control and keep accurate balance sheets. What are the three types of inventory on a manufacturer's balance sheet?Manufacturers deal with three types of inventory. They are raw materials (which are waiting to be worked on), work-in-progress (which are being worked on), and finished goods (which are ready for shipping).
What are the types of inventory in manufacturing account?The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, and Maintenance, Repair, and Overhaul (MRO). You can practice better inventory control and smarter inventory management when you know the type of inventory you have.
What are the 3 inventory accounts for a manufacturing business?In a manufacturing firm, there are typically three inventory accounts: raw materials, work-in-progress (WIP), and finished goods. The raw materials account includes all of the materials that will be used in the manufacturing process.
What are the inventories of a manufacturing company?In a manufacturing business, inventory is not only the final product manufactured and ready to sell, but also the raw materials used in production and the semi-finished goods in the warehouse or on the factory floor.
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