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What does inventory mean to your small business

Inventory is stock, goods, and merchandise that you either buy from another or make yourself then you sell on to someone else. It is an important current asset of a business and serves as a buffer between sales of goods and production or purchase of goods.

Cost of inventory is related to the cost of goods sold that is reported on the income statement. Businesses are trying very hard to find the optimal amount of inventory to avoid lost sales, high holding costs as well as disruptions in production, etc.

If you are a product-dominated small business like a retailer or wholesaler, sure you have inventories and a good inventory-control feature will be an essential part of bookkeeping. It is because you have to track each inventory item offered for sale.

If you are a manufacturer, a good inventory control system is even more important as it gets more complicated. You need to track raw materials, work-in-process and finished goods, thus, individual sub-ledgers should be established for each of these categories.

As mentioned above that there is a direct relationship between inventory and cost of goods sold, therefore, tracking closely on inventory is key. Majority of all businesses that hold inventories are required to use the accrual accounting method, thus making good inventory records compulsory for precise tracking the material cost associated with each item sold.

Effective and proper inventory tracking systems are able to provide you answers with these questions:

  • What is the minimum inventory level needed to meet daily orders?
  • How long does it take for each item to produce?
  • What is the standard order of primary customers?
  • Where is the inventory stored in the warehouse?
  • When is it time to ship the inventory?
  • When is it to order more raw materials or goods?
  • Which items are sell well and not selling well?

With answers to these questions, you are able to do proper planning and better decisions for your small business.

 
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