inventory

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The registry of the goods and other items that belong to a person, community or business. Inventory is the registration and recount (quantitative and qualitative) of the tangible or physical things in stock.

The inventory is usually one of the largest assets of a business and appears on the general balance sheet. The registration is normally done through documentation in which a verification and recount are made. In order to efficiently manage the inventory, one must know the different types, the control systems and the valuation methods. Knowing why to maintain inventories or not is also important.

Types of inventory: These are the most common types have to do with the goods that are counted and verified:

• Raw, unprocessed material or resources
• Products that are still in the production process
• Finished products and goods
• Materials and supplies
• Goods, material property, assets, etc. of a company 

Control systems: These have to do with the frequency of the verification and recount of the goods:

• Initial inventory: those items that are registered as goods of a business. In general, this is done at the beginning of the accounting period which is usually January 1st.
• Final inventory: this verification and recount is done at the end of every fiscal period, usually December 31st.
• Periodical inventory: the collection of items that are verified and recounted at a specific point in time.
• Permanent inventory: the collection of items that are verified and recounted on a daily basis or every time an order is received or made for a good that is produced or sold.

Valuation methods for inventory: An organisation decides to value similar goods that are acquired together in lots on different dates during a specific period of time and that might have a distinct cost per lot if the merchandise’s was subject to fluctuations. The most common types are:

• The Average cost method
• The FIFO method (First In, First Out)
• The LIFO method (Last In, First Out)

Reasons to maintain inventory:

• Reduce ordering costs: If fewer orders are made during a determined period of time, ordering costs per year are reduced.
• Reduce the costs of not having materials: When a company doesn´t have the inventories it needs for its production process or to meet the demands of clients, this costs money, can cause the loss of a sale, make a client unhappy or even slow or stop production.
• Reduce acquisition costs: When purchasing materials, the costs of the goods, shipping and handling can be reduced sometimes depending on the amount ordered (the costs going down when the quantity goes up).

Reasons not to maintain inventory:

• Warehousing or storage costs: There can be costs related to rent, conditioning, maintenance, protection, shipping, reception, handling, taxes, insurance and administration.
• Costs of coordinating production: Large inventories obstruct the production process by requiring more personnel to resolve transit, congestion and coordination problems.
• Costs of reductions in capacity: The materials or goods that are ordered, conserved and produced before they are necessary interrupt and reduce the production capacity.
• Costs related to defective products from large lots: The capacity to control the entrance and exit of defective products in large lots is reduced.