Inventory, often termed merchandise, refers to materials and goods that a company holds for marketing to clients. In other terms, these materials and goods serve no other end in the company except to be marketed to clients for a profit. They are not employed in the production or promotion of business operations.
Also, the principal purpose of inventory (current assets) is to market them to customers for a profit. However, note that just because goods are for trade doesn’t imply that you can consider it an inventory.
Moreover, being an accounting word, inventory includes all stock in the different manufacturing stages and is a current asset. In addition, by maintaining an inventory, both retailers and manufacturers in large companies and MSME can sell or produce items either by using their funds or by availing of an MSME loan.
What is the meaning of inventory?
Inventory in simple terms refers to the stock or merchandise that large companies or MSME (If you do not know the MSME full form, it stands for Micro, Small and Medium Enterprises) market to gain some profits. Also, inventory is material, goods, or products, and their quantity keeps changing from time to time.
On the other hand, assets such as equipment, furniture, fixtures, or any such things remain steady over time.
In addition, in accounting terms, inventory is handled as a ‘current asset’ which a business or a company keeps for less than a year. Some examples of current assets are accounts receivable, expenses, and also insurance policies.
Moreover, inventory that remains with the business after one year gets treated as deadstock or obsolete goods and is usually considered a liability. Apart from this, inventory performs the following functions:
- Maintaining demand and supply.
- Understanding the needs of clients and goods finished.
- Raw material and component availability.
- The significant demands for processing and its production.
- Knowledge of goods required for production.
Understanding different types of inventory
Mentioned hereunder are different types of inventory.
In production or trading business, variations and market movements cannot always get foretold. Such adjustments can harm your sales or production method, which can point to out-of-stock circumstances. Buffer inventory strives to compensate for this by following the maxim that prevention is always better than cure.
Buffer inventory (also identified as safety stock) includes the goods stored in the repository of a store or a factory to mitigate the impact of unanticipated shocks. Also, a sudden increase in demand, delays in transportation, or work strikes can get managed if enough buffer inventory is maintained.
Many companies carry numerous manufacturing activities on multiple machines. The yield of one machinery gets fed into the subsequent machine for further processing. Nevertheless, the process only runs evenly if all the connected machinery in your production unit runs in tandem.
A disruption in any machinery can hinder the whole process, which is when decoupling inventory comes in handy. Decoupling inventory includes items kept in stock to be processed by another machinery if the former machine fails to produce its conventional yield.
Lot Size Inventory
If a company purchases or manufactures goods in higher quantities than the current market scenario, it is known as lot-size inventories. You can purchase such goods by exercising the benefit of some discounts in quantities, decreasing the transportation time and its expense, setup, and clerical expenses, which is not possible for producing or purchasing items at the same rate get sold or used.
Such inventory is known as cycle stock, and a portion gets finished when more orders get dispatched to the clients.
Work in progress inventory
When companies transfer raw materials for processing but are still expecting to get accepted as finished goods, this inventory is known as a work-in-progress inventory. In simpler terms, the work in progress section includes all the goods that have been processed but not sent for trade.
MRO is an acronym that stands for Maintenance Repairing and Operating supplies. Also, this kind of inventory is suitable for production industries where MRO items do not get accounted as inventory goods in books of accounts. Nevertheless, they play a vital part in the day-to-day working of a company.
In addition, MRO supplies get utilized for repair, maintenance, and upkeep of the tools, machines, and other equipment employed in the production method. Moreover, some examples of MRO items are coolants, lubricants, gloves, uniforms, nuts, bolts, and fasteners.
Transit inventory refers to goods getting transferred from one place to another. Examples of this include raw materials getting carried to the plant by railway or finished goods.
Examples of types of inventory
Listed below are some examples of the different types of inventory.
- Anticipation Inventory: For the winter season, the businesses producing their cosmetic produce related to winters boost their production in expectation of the winter season.
- Lot Size Inventory: Before the rainy season, a company produces or purchases a lot of gumboots, raincoats, and umbrellas, and this is lot size inventory.
- Work In Progress (WIP) Inventory: The various bicycle components utilized for building its structure at a workstation are known as Work In Progress inventory.
- Decoupling Inventory: An event management business keeps a stock of artificial flowers so that they can use these plastic flowers in case of a shortage of real flowers. Here, artificial flowers serve as a decoupling inventory.
Advantages of inventory analysis
Many businesses prefer inventory analysis as it increases their profit by reducing their expenses and increasing turnover. Some additional benefits of inventory analysis are as follows:
- Improves cash flow
- Reduces the risks of stockouts
- Growth in the number of satisfied clients
- Overcoming wasted inventory
- Overcoming delays in projects
- Getting more economical pricing from vendors and suppliers
To summarise, we can say that an inventory is a significant asset for any manufacturing company, so business owners must know what it means.
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Frequently Asked Questions
Inventory refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit. Example: If a newspaper vendor uses a vehicle to deliver newspapers to the customers, only the newspaper will be considered inventory. The vehicle will be treated as an asset.
There are four main types of inventory: raw materials/components, WIP, finished goods, and MRO.
Inventories include raw materials, component parts, work in process, finished goods, packing, and packaging.
Meeting customer demand: Maintaining finished goods inventory allows a company to immediately fill customer demand for product. Failing to maintain an adequate supply of FGI can lead to disappointed potential customers and lost revenue.
Stock is the supply of finished goods available to sell to the end customer. Inventory can refer to finished goods, as well as components used to create a finished product.