- August 4, 2020
- Posted by: saenicsa
- Category: Accounting
The way your business manages its inventory can either result in being a critical step towards success or a shortcut to utter disaster.
Why? Well with inventory there are many things that need to go right and many different variables that need to be taken into consideration for your business to function. It isn’t by any means a part of your business that can just be set on autopilot, so to say. Inventory requires constant and frequent management.
With that in mind, today we are going to go over a few basics in relation to this account and some important things that need to be kept in mind.
Where can I find inventory on my financial statements?
Your inventory account can be found on the Balance Sheet on the assets side.
Considering that it is one of the working capital assets that is turned into cash it should be somewhere farther down that any cash or bank accounts, but before getting into any fixed or moveable assets, such as land, buildings and etc.
In the example below you can see Inventory right under Accounts Receivable:
What are the different categories that can make up inventory?
Did you know that inventory can be broken down into different categories?
For example, if your business manufactures and produces a final packaged product, this type of inventory can be divided into 3 categories:
- Raw Materials;
- Work in Progress Goods;
- Finished Goods
What are Raw Materials and Work in Progress Goods? When we say raw materials, we are referring to materials that haven’t been transformed or changed in any way. On the other hand, work in progress goods are when raw materials have begun either a transformative or assembly process that once finalized will result in finished goods.
To understand this better, if we are talking about a manufacturing company that makes cell phones its raw materials would be computer chips, batteries and so forth that later become work in progress goods once the phone begins to take shape, but still is not a finished good since it may still need to be fully assembled or packaged.
What are finished goods? Finished goods is the final state of any good. In this state the goods can be commercialized and sold to customers.
Now if your business is a merchandiser, wholesaler or retailer there most likely is on category in your inventory and that would be finished goods.
What are some important points to keep in mind regarding inventory?
If you think that inventory can be kept on autopilot, then be prepared for a big and nasty surprise.
Why? Well, this is because with inventory, even though it is important to have sufficient on hand, too much can be a bad thing since the more inventory that is sitting around waiting to be sold means that there is less cash available for other things, you will need more space for storage and there is a greater risk of inventory being destroyed or lost.
Also, on the other hand if there is too little inventory on hand, this isn’t a good thing either. Because, for example, if a customer suddenly decides to make a large order or there is a sudden break in your supply chain and sourcing some of your raw materials for a while will be impossible, not having sufficient inventory to buy time could be disastrous to your business.
Therefore, inventory is important and to avoid disruptions in your business processes we recommend taking the time to be better acquainted with how your inventory is managed and where there may be opportunities to improve.
In this manner, not only are headaches and surprises avoided, but your business will be better prepared and more profitable.