What Is Inventory Management?
Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and proper warning of a shortage.
Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.
One measurement of good inventory management is inventory turnover. An accounting measurement, inventory turnover reflects how often stock is sold in a period. A business does not want more stock than sales. Poor inventory turnover can lead to deadstock, or unsold stock.
Why Is Inventory Management Important?
Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records.
Public companies must track inventory as a requirement for compliance with Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must document their management processes to prove compliance.
Benefits of Inventory Management
The two main benefits of inventory management are that it ensures you’re able to fulfill incoming or open orders and raises profits. Inventory management also:
Saves Money:
Understanding stock trends means you see how much of and where you have something in stock so you’re better able to use the stock you have. This also allows you to keep less stock at each location (store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this decreases costs tied up in inventory and decreases the amount of stock that goes unsold before it’s obsolete.Improves Cash Flow:
With proper inventory management, you spend money on inventory that sells, so cash is always moving through the busines
- Teacher: ABDU RAHEEM VP FACULTY