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Inventory as a term comes in many shapes and sizes depending on the type of business you run.
There are three main categories of inventory:
- Merchandise that your business resells. It includes the items for sale in your shop plus all the stock you’ve got stored in your warehouse. In other words, inventory refers to all the items you’ve bought with the intention of selling to your customers either as is or combined with other products.
- Work in progress inventory or semi-finished goods. Jewelry repairman, for example, might sell locks for chains and watches as part of a repair job.
- The goods your business makes or manufactures.
Here a couple of things that are not inventory – equipment and supplies that you’ve bought to run your business such as work tools or vehicles are not inventory. These are usually accounted for as assets or expenses. Dropshipping businesses do not have inventory either. It’s usually not considered inventory if you sell goods online that you don’t take ownership of.
It’s very important to account for inventory properly. It’s the most basic level when you understand how much inventory you have, how much it costs you, and how much you’re selling it for plus when it’s selling you can gain insights to help you make smarter business decisions. Working out your profit margins will help you figure out which products are earning you the most money versus which products just aren’t worth it. This can help you identify what types of products to focus on if you want to grow your business.
Inventory accounting can also help you to understand your seasonal sales cycles: what sells better in winter compared to what sells better in summer. You want to have enough stock on hands and don’t want to run out of popular items during this season.
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