Inventory management is the process of tracking and reviewing the inventory in your company. Usually, you do this in an inventory management system.
Usually, businesses do this with an inventory management system.
Your inventory is one of the most important assets in your business. That’s because selling items from your inventory generates the main part of your revenue. Inventory is also one of the assets that can be most easily converted into cash—opposed to fixed assets, such as property or a company car.
Having items that can be easily converted into cash, is good for the liquidity of your business. Liquidity can be described as your ability to cover bills from suppliers, as well as your fixed costs, such as rental costs and insurance.
The importance of inventory management
Keeping track of your inventory, is important for several reasons:
- You have to record the stock that you have in your inventory in your general ledger and include it on the balance sheet, which you submit as part of your annual report.
- Having an accurate and up-to-date overview of the financial position of your company is vital to make good business decisions moving forward.
- It helps with budgeting.
For example, you’d be able to identify whether you’re overspending on raw materials, compared to how much you’re earning from the items you sell.
Inventory management would also help you identify whether you have too much value tied up in inventory, and whether you should improve your sales and marketing efforts to increase your revenue.You can also use sales figures related to your inventory, to help anticipate customer demand going forward.
Annual inventory count
Even if you have a good system in place to manage your inventory, you need to do an inventory count at least once a year. Your inventory could be affected by theft, damage to items, misplaced items and so on.
However, if you have a good system for inventory management—ideally an inventory management system—the inventory count shouldn’t be too much of a hassle. Once you’ve done the count, you have to update your system and your general ledger.