Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and proper warning of a shortage. Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow. One measurement of good inventory management is inventory turnover. An accounting measurement, inventory turnover reflects how often stock is sold in a period. A business does not want more stock than sales. Poor inventory turnover can lead to deadstock, or unsold stock.
Why Is Inventory Management Important? Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records. Public companies must track inventory as a requirement for compliance with Securities and Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must document their management processes to prove compliance.
The two main benefits of inventory management are that it ensures you’re able to fulfill incoming or open orders and raises profits. Inventory management also: