Proper inventory management is an essential part of all businesses, but it’s something that small businesses in particular need to get right if they want to maximize profits. Whether it’s a retail store or a service-based business that sells some products in addition to services, getting inventory right is essential for your balance sheet, tax purposes, and business valuation.
If your company just sells a few products, you only need to count up the stock you have and reorder when it starts to get low. However, when you’re dealing with perishable goods or items like clothes that come in different sizes and colors, the task can quickly become more complex. That’s why many businesses turn to inventory management systems to help keep track of their inventory, with some even offering real-time inventory data and features like RFID tracking and multiple warehouse management.
Merchandise inventory is pretty straightforward, but manufacturing inventory has a lot of components because of the different phases involved in the manufacturing process. For example, the raw materials inventory relates to the goods that will be used to make the finished product. Then there’s works in progress inventory, which are items that haven’t been finished and aren’t ready to be sold but are still considered assets for accounting purposes and need to be tracked.
There are also some different considerations in e-commerce inventories. Many of today’s ecommerce systems don’t require sellers to have the items in their possession, with the seller serving more as a “middle man”. For accounting purposes, only the merchandise the seller actually owns is considered inventory.
There are several inventory accounting methods that can be used. For example, First In, First Out (FIFO) is a popular approach that sees the inventory that has been on hand for the longest being sold first. Other businesses might prefer to use Last In, First Out, or LIFO. There are also different approaches to taking inventory, with some retail stores choosing to take their inventory periodically and other businesses using dynamic inventory management.
This blog post was based off of an article from CPA Practice Advisor. Read the full article here.