Inventory is the biggest cost facing many businesses. But what is it, exactly? We look at the many forms inventory accounting takes and explain how it can help you save – and make! – money.
Inventory is the items that your business has bought with the intention of reselling to customers. The items may be resold without change, or they can be combined into a new product.
Equipment and supplies you’ve bought to run your business, such as work tools, vehicles and stationery, typically aren’t treated as inventory. They’re recorded as expenses or assets.
If you have a drop-shipping business – where you sell goods online but a third-party supplier delivers them to the customer – then you don’t have inventory either. You must own something for it to be inventory.
Inventory comes in lots of shapes and sizes, depending on the type of business you run. There are three broad categories to keep in mind.
This is what most people picture when they think of inventory – items for sale in a shop (and the extra supplies in the stockroom).
Service providers often keep small inventories of products which they sell along with their labour. A plumber, for example, will sell gaskets and filters as part of a job.
Manufacturing inventory is more complex because there are several phases in the manufacturing process. As a result, there are three types of manufacturing inventory:
Inventory has a value – even before you do anything with it – and so it’s listed as an asset on your business balance sheet. But it can lose its value fast if it gets old, out of date, damaged, or the market price for that type of product drops. It also costs money to store.
Inventory accounting helps you figure out the value and costs of your inventory. That’s important for things like setting prices, getting insured, budgeting, working out taxes, and selling your business.
Here’s how inventory accounting and management can help you both save money, and make money:
Good inventory management will also help your cash flow. Instead of tying up money in slow-moving stock, you can keep it as cash and use it for more productive things like paying down debt or improving the business.
To understand your inventory, you need to know how much there is, what you’re spending on it, and how much you’re selling it for.
Costs include purchase price plus things like transport, storage and losses suffered when things get damaged or go out of date.
You can use rough estimates or get super specific in how you work all this out. It comes down to your inventory accounting methods, and the systems you put in place.
If you’re looking to enhance your systems, we can help! Meet with one of our advisors today to learn more.