Why is inventory important for a business

So for example, a business looking to stock its inventory for the coming winter seasons will need to order its goose down coats up to eight months in advance.

From time to time manufacturers or suppliers will offer massive closeout or spot offers with highly attractive discounts. Lower buying costs for the business amounts to lower selling costs to customers. This pulls in and wins over new customers, as well as offers the business a distinct competitive edge. In order to be able to capitalize on low cost offers however, a business must have the necessary working capital available. The amount of working capital available to the purchasing department is directly linked to the amount of current inventory on stock.

Of course, the irony is that if a business falls prey to over-capitalizing on a low cost offer it will be stuck with an overstock issue, tying up its cash flow and rendering itself unable to capitalize on any future opportunities that may arise. Consumer demand is not the only factor that fluctuates. The market price of goods is also susceptible to a complex array of variables — some predictable, others not.

This degree of uncertainty in the market value of inventory is what leads businesses to hedge their risk against sudden price increases in the market. It is a risky strategy because it could very easily leave a business holding unnecessary levels of stock — thereby raising holding costs — in a hedge against possible price increases in the future.

But if the market actually drops and the value of goods plummets, businesses holding stock hedged against price increases will lose a lot of money in a very short space of time. Overall, the success of a business hinges upon how effectively its inventory is managed. The key is to ensure that optimal stock levels are maintained both to protect against sudden and unexpected surges in demand and market prices without over-compensating and holding excess inventory.

A powerful and effective solution lies with inventory management software. Capable of keeping track of inventory throughout every stage in the supply chain in real time, inventory managers are able to access, analyze and forecast inventory needs with accuracy.

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years.

When not writing about inventory management, you can find her eating her way through Auckland. In business, no product is immune to the risk of a product recall.

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We may earn money when you click on our links. Learn More. Why Is Inventory Management Important? Tracking your inventory with a pen and paper could be seriously holding back your business. By Courtenay Stevens. Published on August 09, Share Article. Why use inventory management software? Inventory management software increases your profit. Inventory management software improves customer satisfaction. Inventory management software makes it easier to run your business. What is inventory management anyway?

Minimize storage costs. Minimize losses. Sell more items. Get Started. Zoho Inventory. Learn more about our top brands. Boost product availability.

Improve order accuracy. Inventory management software helps you maintain an organized warehouse—making it easier to pull the right items for customer orders. Balance multiple sales channels.

Promote brand loyalty. Delivering Business Advice Directly to You. Sign Up. By signing up I agree to the Terms of Use. Improve warehouse management. Inventory management software can help you map warehouse space, reduce storage costs, and integrate scanning systems for real-time stock updates. Manage multiple locations.

Integrate with other tools. To sum up. Related reading. Disclaimer At Business. Written by. Courtenay cut her teeth and occasionally her tongue on the world of business when she was eight years old, licking envelopes to help her dad mail calendars to his clients.

Ever since, she has fostered a passion for entrepreneurship, which makes small business one of her favorite topics to write about. Read More. Recent Articles. We looked at dozens of inventory management systems to find the ones with the great Zoho is a top provider of cloud-based business solutions.

Be sure you know the difference between supplies used in your business and supplies used in the cost of sales. General business supplies—such as office supplies , cleaning supplies, and computers—are shown as an expense in your business tax report, but they aren't considered inventory. Supplies used in sales are included in the cost of goods sold, and they're likely considered inventory. The inventory process goes something like this:.

All of the costs for each part of this process are considered business costs. These costs must be recorded. The cost of sales of inventory is included in the profit and loss income statement of your business.

The value of your inventory at a specific point in time is shown on the business balance sheet. Keeping track of inventory in your accounting system and physical business location is important for your business because you need to know how much you have and how much it's worth as an asset on your business balance sheet.

Tracking inventory costs is also essential because it's used to calculate the cost of goods sold COGS. COGS determines gross profit for a business that sells products, and it's used on every business tax form , whether the business is a sole proprietorship, partnership, LLC, or corporation.

There are several ways you can value inventory for accounting and tax purposes. This method works best for expensive physical inventory items, like cars or jewelry. You likely have fewer expensive inventory items cycling through your business, so you can track the individual costs of each. When you have a lot of inventory going in and out and you can't determine the cost of an individual item, you can look at the cost of specific batches of items over a period of time. For example, let's say you buy pens and put customer logos on them.

You might track your pen inventory cost like this:. There are three main types of inventory. A business may use just one type of inventory, or they may use all three.

Raw materials are bought by businesses that plan to rework the materials into a product that is sold for customers. For example, a restaurant may take raw materials like carrots, meat, and spices and turn those ingredients into a stew.