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What is Inventory?

Inventory consists of those accounting items or the raw materials or those specific components which the company uses in its production or sells. The verb “inventory” refers to the very act of counting or listing of various items. Hence it is altogether an accounting term which indicates that the company uses this as a measure to keep a definite count of its current assets or stocks. It is very important for any business to keep a definite measure of its inventory or stocks so that it can actually assess the amount of raw materials it has in its store take orders accordingly and successfully meet its target sales.

What Is Inventory Analysis?

Inventory Analysis is referred to the process of examining inventory or to determine the optimum amount a business should actually carry. This allows the firm to get a clear picture of its inventory that can actually help to keep the business profitable as well as help the business firm keep up with the customers’ demands and focus in increasing sales and controlling costs. In inventory analysis the business firm is involved in calculation that would actually helps a business better understand their existing inventory levels which ultimately improving cash flow, reducing stock outs and altogether increasing operational efficiency. Inventory analysis actually empowers the business instead of beings stagnant. It actually helps the business explore better business opportunities by understand the level of investments that it can commit and acquiring the right mix of products absolutely based on consumer demand.

There are numerous benefits of inventory analysis which includes:

• Reduce stock outs and delays in project- There are some companies which take up projects that require hundreds of items. Now if there is a stock out in between the work takes a halt which can definitely upset the client and damages reputation of the business. Such stock outs often lead to diminishing sales and unhappy customers. Hence keeping a check on the inventory by doing inventory analysis reduces the chances of the same.
• Improving cash flow-According to one of the studies conducted by an U.S bank more than 82% of business fails due to issues in its cash flow. For manufacturing and retail businesses, the vast majority of their cash is represented by their inventory every month. This problem can be addressed by using inventory analysis that will actually help the business understand the lean times and when there can be a rush so that accordingly the business can prepare.
• Maintain strong customer relationship-Inventory analysis enables faster responses and helps the business efficiently address the demands of the customers.
• Reduce the waste of inventory-Writing off inventory as loss is akin to lighting cash on fire. A proper analysis can actually dramatically help the business bring improvements in its inventory control. Hence the same applies to lost inventory, theft, and leakage, which reduces costs and enables the business to introduce cost controls
• Allows better pricing for suppliers and vendors-By analysing the inventory and keeping  all the necessary records the company can actually ensure to make its supply chain much more efficient

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Types of Inventory:

In businesses products often go down a manufacturing line and each of this activity tends to eat a part of the profit margin. This is the reason that lean manufacturing has become so essential for all businesses ti survive in this ultra-competitive global economy. Today businesses focus in tracking all of these costs and inefficiencies through their manufacturing processes. Businesses can categorize materials as they move through the process, from being raw materials to works-in-progress, and finally finished products. Thus in this process inventory can be classified into 4 types which includes:

• Raw materials Inventory- This includes all those items that are essential to make the finished products. Raw materials can include commodities or components which the business either purchases or extracts themselves For accounting purposes, raw materials are considered an inventory asset, debited to raw materials and credited to accounts payable
• Maintenance, Repair and Operating (MRO) Inventory- MRO inventory consists of various items used to keep a manufacturing company function smoothly. MRO inventory can include things like employee uniforms, industrial equipment, cleaning supplies, and safety equipment, as well as any materials used in repair or maintain manufacturing equipment.
• Work In Progress (WIP) Inventory- All the materials that are used to create finished products are considered as WIP inventory. When accounting for WIP inventory it basically gets into businesses own account entry on the general ledger and is an asset. Costs include the raw materials, labour cost, and factory overhead. However calculating WIP inventory is often quite time taking as well as tricky so most businesses look for minimizing it before a specific time period.
• Finished Goods Inventory- Finished goods are those items that are already ready for the final consumers. They have been manufactured from raw materials or purchased from a supplier, and are ready to be sold to customers. For accounting purpose finished goods are treated as short-term assets as it is always expected by the business that it would be sold away as soon as possible  

Benefits of Inventory:

Inventory management actually helps the business in multiple ways. It primarily helps in increasing sales along with bringing in the necessary informational transparency. It also ensures that business have shorter lead times and helps in lowering the overall cost of the business. The business is also benefited by improving its delivery performance and maintaining stronger customer relationship. Inventory management also benefits in increasing employee efficiency, helping in accurate planning in the overall business operations, building customer loyalty and altogether increasing inventory turnover.

Impact of inventory in businesses:

Inventory often indicates the products that we actually sell to the customers. It includes the costs associated with purchasing and selling of the inventory which are then subtracted from the revenue made. Cost and gross profit from sales of inventory is a major part of the business’s tax return. Therefore managing the inventory in a responsible manner is very important for the business to ensure profits as well as meet is able to maintain strong customer relationships in the business.