Inventory Management Strategies for Businesses
Inventories refer to the raw materials the company uses to produce the products for sale as well as the goods for sale. In most businesses, inventory is one of the most crucial parts of the company’s asset as the inventory turnover is one of the primary sources of revenue for the business. Subsequently, it will bring earnings for the shareholders too.
In the balance sheet, inventory is considered as a type of current asset. When the company sells an inventory item, it should transfer the carrying cost of the inventory to the cost of goods sold. Business owners who are running a manufacturing business often need to deal with inventories and their related accounting (Also see Inherent Risks in Accounting) treatments, which can be quite challenging for those who have no prior knowledge in accounting. In this case, hiring an accounting firm in Johor Bahru can be a smart move as the experts will help to do the necessary records so that business owners can always stay on top of the financials of their business.
When dealing with the valuation of inventories, business owners have three different options to choose from. Suppose a company chooses to use the weighted average method. In that case, it should value the inventories and the cost of goods sold according to the average costs of all materials purchased in that period.
Some companies will prefer using the first-in, first-out method. In this case, it should calculate the cost of goods sold according to the cost of the materials that it bought the earliest, and the carrying costs of the remaining inventories should be calculated according to the cost of the materials that it bought the latest. On the contrary, for last-in, first-out method, the company needs to calculate the cost of goods sold according to the cost of the materials that it bought the latest, and the carrying costs of the remaining inventories should be calculated according to the cost of the materials that it purchased (Also see How Do Purchase Orders and Invoices Differ from Each Other?) the earliest.
There are different types of inventories too, which are the raw materials, the work-in-progress, and lastly, the finished goods. Typically, holding a large number of inventories will bring more harm than good to a company in the long run. This is because this will increase various costs such as storage costs and spoilage costs, and at the same time, it needs to face the risk of the inventories becoming obsolete. Nevertheless, this does not mean the lesser the inventories the company has on hand, the better. Having too little inventories may have some drawbacks too. As an instance, the market share of the company may decrease, and it may earn less profit as it lost the chance of making potential sales due to the lack of inventories.
Thus, manufacturing businesses should manage their inventories wisely. They may use various inventory management strategies to minimise the cost incurred for inventories. This is because by using such methods, the company will only produce or receive goods when necessary.