What is an Inventory?

Inventory is an accounting term that refers to assets that are in different stages of being made ready for sale, including:

  • Finished goods (that are available for sales process)
  • Work-in-progress (meaning in the process of being built)
  • Raw materials (to be used to produce more finished products)

Inventory is usually the most significant current asset – items expected to sell within the next year.


Taking Inventory

To guarantee that all accounting records are up-to-date and authentic, businesses manually take an inventory number at the end of each accounting period. It is typically quarterly or annually. Companies that do a daily count are considered to take regular inventory because their count is always current.

However, any difference found between the inventory count on the company’s balance sheet and what is on-hand is termed “shrinkage.” It’s the inventory that is missing, for any reason. Sometimes the stock is lost, other times it is stolen.

Just-in-Time Inventory

One way to try and decrease the size of your on-hand inventory is to use a just-in-time strategy. Using a just-in-time program means that materials are delivered just in time to meet current customer demands. As a result, you have less lying around, waiting to be offered or sold.

To be successful using just-in-time, you have to have a correct idea of how much you’ll sell in between goods deliveries. If you’re selling 300 dresses per week and you receive deliveries every Friday. To keep up with demand ideally you’ll receive 200 this Friday. However, if demand picks up or declines in between shipments, you can end up with problems.

Having too much of it is unsafe because you run the risk of being stuck with merchandise that is out-of-date or past its prime. You may have to mark it down to sell it, through reducing your profit margin.

But having too little inventory, or running short, is a problem, also. Running out of a product your customers want can lead to disappointment and lost sales, especially if they opt to buy from another retailer that has the item in stock. You can lose some money because you didn’t have the needed inventory in stock. It is essential to know how to attract and retain your customer.

While the object of just-in-time is to reduce the need to store inventory – ideally, it would all be sold just as the shipment arrives – keeping detailed track of what you’ll need to meet demand is challenging, since consumer tastes can change promptly.

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Inventory was last modified: August 23rd, 2019 by Mirjana
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