Inventory refers to the goods, materials, and products that a company holds for the purpose of production, sale, and use in its operations.
Primary Implication
For most businesses, maintaining an accurate month-to-month inventory value for Balance Sheet reporting is not useful information to report with precision. You are better served by keeping your operations clutter-free from worthless inventory unless you plan on selling your business.
Overview
Why Inventory Management Matters for Your Bottom Line
Inventory is simply the goods your business holds for sale or use in production. This includes raw materials, work-in-progress, finished goods, and spare parts.
Why is Inventory Different?
Unlike other physical assets (like machinery or equipment) that are meant for long-term use, inventory is typically bought and sold within a shorter period.
Accurate Inventory Counts are Crucial
If inventory makes up a significant portion of your assets, it’s essential to track it carefully. Accurate inventory counts and valuations are necessary for:
- Determining your true profit: Knowing how much inventory you have and its value helps you calculate your cost of goods sold and, ultimately, your profit.
- Making informed decisions: Good inventory management helps you avoid stockouts, overstocking, and losses due to obsolescence.
What is Inventory Write-Off?
Sometimes, inventory loses value or becomes obsolete. When this happens, you need to write it off, which means reducing its value on your balance sheet. This can be done in a couple of ways:
- Expense it: You can treat the write-off as an expense, reducing your profit.
- Reduce the asset value: You can directly reduce the value of your inventory on the balance sheet.
Two Key Considerations
- Do you have inventory you intend to resell? If so, make sure you’re accurately tracking its value.
- Is your inventory worth more than you paid for it? If not, consider selling it off to free up cash and space.
Focus on What Matters
Accurate inventory management is important, but only if it helps you make better business decisions. If tracking every detail isn’t improving your sales or profits, focus on keeping your operations lean and efficient.