Inventory Management: What is it and Why is it Important for Businesses?  

Inventory management is a practice employed by most businesses that allows them to know exactly how much stock they have on hand, what they’re running low on and might need to reorder, and how much excess stock they’re carrying. 

A good inventory management system will ensure that you always have enough stock on hand to fulfill customer orders and handle any trends that may be occurring at the time.

Before inventory gets sold, it actually ties up cash, so having an excessive amount of inventory on hand will reduce your cash flow. However, once it does get sold it becomes revenue, and that effectively removes it from the books as inventory. 

When an inventory management system is functioning correctly, you should have a good stock turnover, meaning that most of the inventory on hand for a given period gets sold to customers. Anything that remains in inventory for an extended period of time is likely to go unsold and will simply be tying up your cash assets.

What constitutes inventory?

Inventory is generally thought of as all those raw materials, components, and finished goods that a company either sells or uses in production processes to create final assemblies. These materials are shipped from one place to another. It’s essential to hire or even buy shipping containers for your products so it’ll arrive safely to where you want it to be. Visit Premiershippingcontainers.com.au for efficient and reputable alternative for customers seeking a shipping container solution to meet their storage, cargo or site demands.

For accounting purposes, inventory is considered an asset, although that asset will begin losing value if it sits there dormant on shelves for a long period of time. 

Accountants use information from your inventory management system to record the proper valuations in their record-keeping.

Why is inventory management so important?

Inventory management is usually a pretty good indicator of the overall health of a company. When there’s too much stock on hand, that generally means too much money is tied up in that stock, whereas if there are constant stock outages, that will usually mean there’s a serious customer service issue. 

All public companies are required to track their inventory in order to comply with rules set forth by the Securities and Exchange Commission, as well as the Sarbanes-Oxley Act. Companies must document their inventory practices in order to demonstrate compliance with these regulations.

Benefits of good inventory management

One of the biggest benefits of an inventory management system that’s functioning well is that it allows you to fulfill customer orders easily because you know how much stock you have on hand. By extension, filling those customer orders puts you in a position to earn greater profits for each accounting period.

Having a good system also allows you to make the best use of the stock you have, in case there’s a trend in progress that you can take advantage of. You can shuffle stock around between your various locations and warehouses, so as to make order fulfillment that much easier for all locations.

When you have your inventory management functioning at its best, you’ll only be purchasing stock that sells, so less of your money is tied up in stock that just sits there on the shelves. You’ll also know how much stock you have to keep on hand in order to reach the level of customer service you’ve targeted for your company, e.g. 97%, 100%, etc.

Challenges to inventory management

There are several challenges that must be overcome in order to get your inventory management system functioning smoothly and providing maximum value to your business. First of all, it’s extremely important that you don’t allow the stock to accumulate unsold on your shelves because that’s a sure way to lose cash flow and create problems for your operations.

The flip side of that coin is not having enough inventory on hand to fulfill customer orders, and that can be dangerous as well since you could lose customers very easily when you can’t handle their orders. Another daunting problem is having your system so chaotic that you don’t know exactly what you have on hand, and you don’t know exactly where it’s located.

All these issues are capable of harming a business badly enough that you could have to shut your doors to the public, even if it’s just a temporary situation. If your system is not working well enough to tell you all the details about your stock, you won’t know when to reorder and you won’t know when you’re completely out of a given item.

Some inventory management systems have yet to be modernized and still rely on outdated, manual processes that are inaccurate because they’re prone to human error. 

In a good system, similar products are usually grouped in adjacent locations, to make it easy for them to be found by handlers. If your system isn’t doing this, you could be wasting considerable time trying to find items so they can be picked and packaged.

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