Are you looking to sell products to customers and set up a successful business but aren’t sure what inventory does for your business? Find out more about what inventory is in business and how to use it in this guide.
Discover the main functions of inventory in business, including:
- Inventory as what you need to run your business
- Inventory as an asset to use
- Inventory as a liability to manage
As you’re about to launch a new business venture, you may need to learn more about financial basics. Read on to learn more about inventory in business and how Countingup can help you understand your finances better.
Inventory as what you need to run your business
As you’re setting up your new business, you might hear inventory used in several different contexts. Inventory typically refers to anything your business has or needs to make its profits. If you sell products to customers, you need an inventory of products to sell in the first place.
Therefore, ‘inventory’ in this context is functional and can refer to things like:
- Raw materials: to make products, like wood, plastic, metal or fabrics
- Finished goods: the products themselves once they’re made
- Works in progress: the products as they’re being made
- MRO goods: maintenance, repair or operational supplies, like tool kits and office stationery, that help keep your business running
- Packaging materials: the materials used for products when transporting them to wholesale retailers or customers directly
Depending on the type of business you run, your inventory might look slightly different. For example, if you make products, you may have each of the types of inventory listed above. However, if you have a retail business where you buy existing products to sell to customers, you likely won’t have raw materials or works in progress.
As you’re trading and selling products to customers, you’ll need to know how much product is available in your business to sell to maintain good supply levels. Otherwise, you could run out of products, and customers will purchase from your competitors as you’ll have nothing to offer them.
Managing the types of inventory listed above impacts your business in different ways and understanding how for each is an essential element of running a successful business. While ordering raw materials or finished goods might involve purchasing and delivering goods, your business may be affected by varying manufacture and delivery times.
Balancing these different time-strains on your business from your inventory is called ‘supply chain management’. Find out more about how you can improve your business’ inventory in our article What is inventory management?
Inventory as an asset to use
In accounting terms, inventories of products and goods are also treated as a type of asset – listed as ‘current assets’ on your financial records.
This is because as customers purchase your products, they create value for your business. Therefore, you can incorporate this value within your business’ financial records from the products you haven’t yet sold (that are part of your inventory) but are confident you will. This accounting strategy allows you to forecast your business’ profits using grounded examples and helps your financial predictions be more realistic and accurate.
Treating your inventory as an asset can also open financial opportunities for your business. For example, you may be able to secure business loans to your inventory assets if certain banks or lenders accept them. This will be highly dependent on what you sell and have in your inventory to offer as collateral. For example, lenders will be hesitant to accept newer products as collateral because customers haven’t demonstrated their real value yet.
If you’re starting a business, you might not have a strong sales history to accurately predict your inventory’s market value. Therefore, try to be as reasonable as possible until you have a sales record to rely on.
Inventory as a liability to manage
Inventories can also be a weak point in many businesses as they are a source of liability (or financial risk) until they’ve sold.
Your business’ success is tied to your ability to market it to customers and sell products. Therefore, if something goes wrong (or just doesn’t go right enough), you can be financially tied to lots of product inventory without real value or customer interest. Therefore, it’s important not to expose your business to too much risk.
This is because, while you want to have enough inventory available to sell to customers when they’re interested, you also don’t want to have too many products left over that won’t sell when they’re not. Managing this financial risk to your business takes care and consideration and will be a part of your business’ strategy for as long as it exists.
Understand your inventory better with Countingup
If you’re looking to understand your business’ performance better, use Countingup. Managing your product manufacturing process and inventory levels are essential elements of a successful business, but bookkeeping is often a draining chore.
The Countingup app automates your financial admin so you can stay focused on building your sales and getting back to doing what you love. With your business current account and accounting software in one app, you can save time every day and keep on top of your finances while trading with ease.
Countingup offers real-time profit and loss statements, so you can better understand how successful sales strategies impact your inventory levels. Countingup also comes with receipt capture reminders and automated invoicing, so you can make sure your accounts are always accurate and up to date.
Gain complete confidence in your books and save time with the Countingup app.
Find out more here and sign up for free today.