What is Inventory Management?
Inventory management is sorting and managing the company’s non-capitalized assets or inventory. It includes processing, warehousing, and transferring raw material or finished products to the sales point.
Inventory management is a tedious task for larger manufacturing units or an organization. Protocols are followed in larger organizations, such as the raw materials going to the warehouse and the point of sale. However, in smaller companies, these may just arrive in the sales area.
Keeping an account of stock and re-stock is manually an arduous work for any organization, irrespective of the size. But, thanks to technology, businesses now have access to ERP software. Larger companies can take the help of customized inventory management software.
What is Inventory Accounting?
Inventory accounting refers to non-capitalized or current assets of the company, which are in the form of raw materials or finished goods. While preparing the balance sheet, it is mandatory to indicate inventory; however, to do that, real-time stock-taking of inventory must be done. Three methods are used in inventory accounting, such as First in First out Costing (FIFO), Last in Last out Costing (LIFO), or average weight costing.
Categories of Inventory Accounting
- Raw Materials: It refers to basic materials that an organization or a company needs to process into a finished good.
- Work In Progress: It refers to raw materials which in the process of getting a shape of a finished product.
- Finished Goods: This is nothing but goods or products that are readily available for a sale.
- Merchandise: Merchandise is a finished product that the retailer buys from the manufacturer for reselling.
Inventory Management Strategies
The inventory management strategies may vary from company to company, depending on the size. Some of such strategies include the following-
- Just in Time Method: In this method, the company only invests money in the required or limited inventory that is needed to make a product or sell. It will not only reduces the cost but also sorts out storage issues and wastes. This method also carries some risks. If the demand suddenly exceeds, the vendor may not be in a position to meet the growing demand. If the stock does not reach on time, the vendor may lose his credibility, thus damaging the company’s reputation.
- Material Required Planning Method: Here, the manufacturing company must have previous sales records to predict the sales for the forthcoming period. This method allows the manufacturing unit to send the required inventory to the supplier. But, this method carries a lot of risks. Inability in providing an accurate sales record may result in an inability to meeting the demand.Thus, this could affect the reputation of the company.
- Economic Order Quantity Method: This model refers to calculating the right amount of inventory that needs to be added to the current stock. It helps in minimizing the cost of inventory while still meeting the rise in demand. Not just the cost-effectiveness, this model also ensures that there is no excess stock that results in no value.
- Days Inventory Method: This method indicates the number of days that the organization or company will take to clear the stock, in terms of sales. In other words, it also refers to the fluidity of the inventory. Lower the DSI (Days Sales of Inventory), faster the stock clearance. But, the DSI differs from industry to industry; the standard figure does not fit all.
- Quantitative Analysis Method: This method allows analyzing the company’s inventory management. The companies are required to disclose the inventory reserves under LIFO, which can be compared to FIFO costing. The organization that keeps changing the method may be trying to paint a better picture of the company, which means that the company is not capable of selling off its products and remain competitive in the consumer market.