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What is stock?
Every company requires funds for effectively carrying out everyday business operations. Thus, businesses keep some goods with high value and long duration in hand to be traded for money when the need arises. Therefore, stock, or inventory, refers to products that a company holds to sell in the future for a profit. For a business, the stock is the center of all its activities since inventory is the primary source of revenue. Furthermore, inventory can be classified in multiple ways. However, managing inventory directly impacts a company’s ability to fulfill domestic and international orders.
What is inventory?
Inventory is one of the most significant costs companies face. The products your company has purchased with the intention of selling to your customers are inventory. You can sell the goods without change or in combination with other products after modifications. Thus, inventory constitutes every component that can be used in producing other products or sold directly to customers.
Furthermore, businesses practice inventory management to ensure enough stock is on hand and identify when they might face a shortage. Holding too much inventory for a company can harm its revenue due to spoilage costs, storage costs, and the risk of inventory obsolescence. Even the market price of the product might drop.
That’s where inventory management assists businesses; in forecasting and strategizing how much inventory to hold and when to let go of the excess inventory.
Furthermore, inventory management can help with strategies such as a just-in-time (JIT) inventory system. Thus, inventory management assists businesses in reducing inventory costs.
Lastly, holding too little inventory might get unfavorable for businesses due to the risk of losing potential customers and sales opportunities.
Here are some of the primary benefits of inventory management:
What doesn’t fall under inventory?
As a business, you often purchase equipment and other supplies to carry out various functions and business operations. Those equipment and supplies, including vehicles, tools, stationery, etc., are not counted as inventory. However, they are recorded as expenses. When you are an e-commerce business and sell goods directly supplied from a third party to your customers, those goods don’t constitute inventory either. Furthermore, you must own goods for them to be classified as inventory.
What is inventory accounting?
As an accounting item, inventory falls under current assets. Furthermore, it refers to all stock currently employed in various production stages. Retailers and manufacturers can continue selling and manufacturing products by holding enough stock. For most companies, inventory constitutes a significant asset on the balance sheet. However, keeping too much stock might even become a liability.
There are three ways of valuing inventory , including the following:
The First-In, First-Out (FIFO) Method:
According to this method, the cost of goods sold (COGS) depends on the cost of raw materials purchased first. However, the carrying costs of the remaining inventory depend on the cost of the last raw materials purchased.
The Last-In, First-Out (LIFO) Method:
According to this method, the cost of goods sold (COGS) depends on the cost of the latest purchased raw materials. However, the cost of raw materials purchased first determines the cost of the remaining inventory.
The Weighted-Average Method
This method requires valuing both cost of goods sold and the inventory depending on the average cost of all materials purchased during the period.
Inventory accounting helps businesses calculate the costs and determine the value of their inventory. Thus, inventory accounting is vital for businesses in getting insurance, setting prices, planning your budget, calculating taxes, and even selling your business.
Four main types of stock
The inventory process constitutes four main types of inventory. It’s crucial you understand the difference between the primary four types of merchandise for making more informed financial decisions for your business and the supply chain network. Furthermore, you can practice inventory management, control, and accounting more effectively when using different types of inventory. Lastly, it helps you pick the ideal inventory management software for keeping track of inventory.
Raw materials are components used in the production of other products. Furthermore, raw materials are goods that are currently in stock and have not been used in either work-in-progress (WIP) or finished goods. Raw materials can be classified into direct and indirect raw materials.
Direct raw materials are used in the production of other products. In contrast, indirect raw materials form part of overhead or factory costs.
Work In Process (WIP)
As the name suggests, Work-In-Process (WIP) is unfinished goods or on which work is ongoing. Furthermore, it includes labor costs and raw materials that are still in production at the time of finishing the accounting year. In simpler terms, whatever raw materials, whether direct or indirect, your business uses to produce finished goods is referred to as work-in-process inventory.
Finished goods are goods you have manufactured to be sold to your customers. Any product ready to be sold to your customers is referred to as finished goods.
MRO (Maintenance, Repairs, And Operating Supplies)
Overhaul or MRO constitutes repairs, maintenance, and operating supplies. Furthermore, MRO inventory is usually about minor details. MRO is an inventory that requires you to assemble and sell the finished goods. Simply put, MRO support the production of finished goods but are not directly a part of finished goods. However, MRO is not included in the finished product itself. Furthermore, it depends entirely on your business, whether you hold this inventory in storage, with a supplier, or in transit to send out for delivery.
Inventory vs. stock: What's the difference
Stock includes parts, materials, and finished goods that are produced or purchased for selling to customers. The profit depends on the number of products or stock your business sells. In contrast, inventory includes finished products and other assets a company owns.
In simpler terms, the stock is the supply of finished goods a business uses to sell to end customers. While inventory refers to finished goods and the components used for producing those finished goods.
Thus, all stock is inventory. However, all inventory is not stock. Since there’s only a subtle difference between the terms, the distinction is of no significant consequence for businesses.
Inventory and stock examples
We have compiled a list of items that form part of the inventory and stock examples. The following examples of inventory and stock manifest how different types work in retail and manufacturing businesses:
- Raw materials
- Finished goods
- Work in progress (WIP)
- Maintenance, repair, and operating supplies (MRO)
- Safety stock
- Packing materials
- Anticipated inventory
- Cycle inventory
- Decoupled inventory
- Service inventory
- Book inventory
- Transit inventory
- Excess inventory
What is the procedure for stocking inventory?
Businesses must get the procedure for stocking inventory right since it’s an essential aspect of stock control.
- You should stick to a single inventory control system, whether you choose a periodical or perpetual system.
- However, the perpetual system delivers more relevance, accuracy, and ease of use.
- You must review current inventory levels, including raw materials, finished goods, and the amount in value.
- Review your sales report to analyze which product has the highest demand, which leaves you the highest gross margin, and which products are old and slow-moving.
- You should also determine your ideal inventory levels. Furthermore, you should decide the maximum, and minimum stock levels for each product and minimum reorder levels for each item.
- You should regularly review your stocking inventory procedure and implement changes where necessary.
How much stock should you keep?
Several factors can help you determine the level of stock your business should hold at any time.
- Customer demand management to get an idea of orders and forecasts
- Analyze whether your customers are ready to make a long-term financial commitment with you
- You can use several factors, including sales and other data you receive from your customers, to help your business with demand planning.
- Consider internal and supplier lead time.
If you are wondering how you will know whether you are holding sufficient inventory, it’s when you can deliver what your customers demand and when they demand it. Furthermore, you will need as little money as possible to fulfill that order.
Stock controlling methods
Here are some of the most tried and tested stock controlling methods to better manage your inventory levels, regardless of your business model:
This stock controlling method originated in Japan. As the name suggests, you reorder stock just when it is required. It reduces costs and increases liquidity.
You must conduct regular stock reviews to determine whether more stock is required and when.
This stock control method requires you to reorder stock, either at fixed levels of stock or specified time.
Economic Order Quantity (EOQ)
The calculations are time-consuming, requiring you to hire a professional to smoothly carry out the stock controlling process. It can also be combined with other methods for ease when needed.
It separates inventory management and production into batches, reducing the challenges facing the production process. Furthermore, it also ensures short-term targets are met. Lastly, batch control also reduces costs.
Vendor-Managed Inventory (VMI)
It is a relatively new method of stock control that comes with a shared risk for both buyers and suppliers. Furthermore, it reduces the risk of understocking and reduces the time inventory spends in a supply chain network.
Pros and Cons of Stocking Inventory
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A stock control system incorporates all the functions and processes of inventory management, control, and maintenance. It includes all aspects of inventory management, including purchase, inventory turnover, shipping, reordering of products, etc.
Features of the stock control system include the following:
- Real-time support
- Never-ending inventory control and tracking
- Sales and shipping support
- Automated reordering for procurement support
- Supports integrations with other programs
- Generates in-depth analysis and actionable report
- Firstly, the product is delivered to your facility, inspected, sorted, and stored.
- Secondly, inventory levels are updated before and after customer orders are received.
- Lastly, current inventory levels are calculated, and a reorder is placed for stocking up enough inventory.
The first step in inventory management is the planning and forecasting of consumer demands for a product. This step allows businesses to analyze customer trends and sales data to determine how much quantity of a particular product they need to meet customer demands. Without carrying out this step, deciding how much inventory to keep in hand might be challenging without running the risk of overstocking and understocking.
- Coordinate with vendors and suppliers
- Hire a professional inventory control manager
- Keep track of product lead time
- Purchase an inventory management system
Here are some tips for effective inventory management for increased profitability:
- Define your processes and inventory types
- Use an inventory management system that suits your business model
- Leverage integrated technology
- Track your sales
- Maintain stock security