Being successful in your business depends on so many factors. Among them, inventory is a very important one. Let’s try to know all about it and how it affects your business.
All about inventory in short
First of all, we have to know what is inventory. When a quantity of goods are owned and stored by a business for either resale or as raw materials used in producing goods that the business sells, it is called inventory. Inventory can be of 3 types.
Work in progress
There are several inventory methods but 3 among them are very popular and widely used.
FIFO (First-in First-out)
LIFO (Last-in First-out)
Weighted average cost
Inventory management will determine whether the production cost will increase or not. Depending on production cost, you’ll know how much profit your business would draw.
Having a high amount of inventory allows high capacity for production but it also increases the cost of production. Having the low amount of inventory is also bad as it will decrease your production capacity.
Basically, there are 5 reasons for a business to maintain inventory.
To change the amount of production according to the anticipated demand
To stay protected against sudden increase in demand
To minimize cost by ordering raw materials in bulk
To prevent complete break down if on part of the factory stops working
To keep flowing the materials to the retailers with a steady stream
For the perfect production with minimal cost, inventory management forecasts and build strategies for just-in-time (JIT) inventory system. This way of inventory method creates or receives the goods just when they are needed.
Knowing about inventory you must know the differences between inventory control and inventory management. So let’s talk about them.
Inventory control means warehouse management. Which means it will keep track of the stock you already have. And it also has aspects of warehouse designing like where every of your products is stored.
On the other hand, inventory management is like stocking the correct or right amount of inventory and economic order quantity.
Now let’s talk about some examples. Suppose you are selling both Adidas and Nike shoes. So these are both inventories for you as you bought those from manufacturers and are selling at a higher amount which results in profit for your business.
Another example can be that H&M manufactures 80% of its retail inventory in advance. They introduce the remaining 20% based on the recent market trends. This strategy helps the company to reduce their lead times and inventory control.
One of the biggest challenges in inventory control is to decide how much products to orders to the manufacturers. To avoid this inventory forecasting must be utilized to keep inventory levels low and adequate to match customer demands.
Inventory are classified as current assets. Because the business intends to sell their products within a year from the date that it is listed on their balance sheet. So you should keep a proper balance sheet and inventory control from the beginning of your business.