Inventory management - What does inventory management mean? Read more here

Get a handle on inventory management for your business and online store. Learn how effective inventory management can optimise your inventory levels, reduce costs and improve customer experience. Find the best solutions for your business

Optimise inventory management: How to ensure efficient inventory and reduce costs

What is inventory management?

Inventory management refers to the process of managing a company’s stock. It includes activities such as:

• Monitoring stock levels
• Ordering new products
• Storing products
• Picking and packing orders
• Shipping goods to customers
• Recording stock movements

Good inventory management is essential to minimize costs, improve customer satisfaction, and optimize operational efficiency.

Inventory management

Inventory management is a critical part of any business that handles physical products. It involves monitoring and controlling stock levels, orders, sales, and deliveries. Effective inventory management ensures that a company has enough products available without tying up too much capital in stock.

Inventory management in accounting

In accounting, inventory management plays an important role in a company’s financial reporting. Inventory represents a significant asset on the balance sheet, and accurate stock figures are crucial for preparing precise financial statements.

During periodic stock takes, the accounts are updated to reflect actual inventory levels. This ensures that the inventory is correctly valued, which affects the company’s income statement through cost of goods sold (COGS) and expenses.

Example of inventory management in practice

Let’s take an example of an online store that sells electronics. To illustrate inventory management in practice, let’s assume the store has the following items in stock:

To ensure the inventory is optimally managed, the store should follow these steps:

1. Ordering new stock: When the stock level for an item reaches a certain threshold (reorder point), the store should order more products from the supplier. For example, if the reorder point for smartphones is 10, an order will be triggered when the stock reaches this level.
2. Storing products: When new products are received, they must be recorded in the inventory management system and stored properly. This ensures that the products are accessible and easy to locate when picking for order fulfillment.
3. Picking and packing: When a customer places an order, the items must be picked from inventory, packed securely, and prepared for shipping. It's important to ensure the correct products are picked and packed to avoid errors and returns.
4. Shipping: The packed goods are shipped to the customer, and shipping information is recorded in the system to track stock movements.
5. Stock take: Periodic stock takes are conducted to ensure that the actual stock levels match the recorded data. This helps identify shrinkage and discrepancies.

Inventory valuation method

There are different methods to calculate the value of inventory. A common method is FIFO (First In, First Out), where the first items purchased are assumed to be sold first. Let’s look at an example:

The value of the remaining inventory is calculated by multiplying the remaining units by the purchase price. In the example above:

Conclusion

Inventory management is an essential part of running an efficient and profitable business. By understanding and applying the basic principles correctly, businesses can optimize their stock levels, minimize costs, and improve customer satisfaction. Whether you run a small online store or a large retail business, good inventory management will be a key component of your success.

Get a handle on inventory management for your business and online store. Learn how effective inventory management can optimise your inventory levels, reduce costs and improve customer experience. Find the best solutions for your business