• Posted by: Melissa Jordan
• In: Accounting & Finance

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In business management, inventories are lists of the goods and material a company has available in stock. If a business does not have an inventory, it cannot be truly considered as a business.

Inventories provide a business with a comprehensive view of the properties it owns. In the broadest sense, inventories deal with the stock level of items it has for sale. But inventories also deal with the properties a business has that are not for sale.

These properties include office equipment, office supplies, warehouses, land properties, and other items related to the business, whether or not they are used in the day-to-day operations of such.

Manufacturing organizations have three categories for sellable items on their inventories: a) the raw materials/parts which are to be used in making products
b) the materials/parts which are already in the process of being transformed into finished products, and c) finished goods - the goods that are ready for sale, trade or stock.

For example, in a canning factory, items such as raw tin cans, the raw food stuffs to be processe are considered to be under category A of the above mentioned categories.

When these raw materials are processed, but are not yet finished - as in the case of food stuffs that are already canned yet lack the proper labels and price tags - they are listed under category B. When the product is ready to be sold, they are then listed under category C.

Financial accounting

An organization's inventory has its advantages and disadvantages. The disadvantage of such is that inventories are counted as assets on the organization's balance sheet. However, it also makes funds immovable when they might have been appropriated elsewhere.

Moreover, it costs the organization to have these assets protected. Inventories also induce increased tax expenses.

On the other hand, since inventories show up as assets in an organization’s balance sheet, they can be turned into cash through selling. Some organizations intentionally hold large inventories to bloat their apparent value on the market.

Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. The business therefore stands to gain from a proper inventory system.

Since the inventory shows a business’ capability to deliver goods ordered of it, the business may be able to adjust their inventory, increasing or decreasing it, according to market demand.

Why inventory?

Without a proper inventory a business cannot know what assets it has at its disposal. It also is blind to the quantity and status of the goods it may, or even, may not have.

For example, a business that does not have a proper inventory is asked to deliver 100 crates of its goods. Without an inventory, the business does not know if it even has that number of crates.

In the case of non-sale inventories, businesses are now able to keep track of equipment purchased and their status.

Too often, businesses with sloppy inventory systems do not keep track of their existing equipment. Without this, no one is accountable for equipment that gets stolen or damaged. The business ends up spending more to replace these equipments, when in fact, someone might be stealing from or sabotaging them.

Proper inventory keeping may be a painstaking, time-consuming process that leads many businesses to forego such altogether. However, without one, a business cannot operate efficiently, and properly.