Inventory management plays an important role in the smooth functioning of the company’s facility operations. It acts as a buffer stock between the manufacturing process and the finished goods. Therefore, an analysis of company Inventory is important to examine and evaluate the efficiency of a business. Inventory analysis includes tracking and monitoring inventory levels. Companies use various accounting methods to analyze their inventory from previous reporting periods. They conduct necessary modifications and disclose additional information about the company. Being a manufacturer, you can use various methods to analyze your company’s inventory. Here are some popular types of company inventory systems explained for your easy understanding.
Types Of Inventory
The inventory shows the current assets of the company, including the sales of finished goods for a specific time. Financial professionals use various techniques to count or measure the inventory. Sometimes, it is physically counted, like when the inventory is in a smaller inventory. But, a few companies also use sophisticated company inventory software for real-time inventory tracking. Usually, professionals use three methods to evaluate company inventory.
- First-in-first-out (FIFO) costing
- Last-in-first-out (LIFO) costing
- Weight-average costing
All these inventory methods are separated into four subcategories. These categories include raw materials, work processes, finished goods, and merchandise.
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Raw material: Raw materials are an important part of the manufacturing process planning. This section includes components used to make finished goods ready for sale.
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Work process: The manufacturing company inventory management system also comprises work process records. This section contains raw materials that are being transformed into finished goods.
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Finished goods: The next category is the finished goods, which represent the finished products of the company. These products are ready for sale to the company’s customers.
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Merchandise: It represents finished goods a company buys from the supplier for future resales. It acts as a buffer and is used to fulfil the customer’s need in emergency cases.
All these categories are used to analyze the financial health of the company inventory. It can help You to examine the supply chain and workflow of the company.
Financial Ratios
Financial ratio is an important tool for analyzing company inventory. Here are some of the popular methods that you can use to calculate the financial ratio of the company.
1. Days Sales Of Inventory (DSI)
DSI is a popular method to evaluate the average time taken by the company to sell its products. Generally, theaverage inventory of the whole year is divided by COGS and then multiplied by 365. (Average annual inventory/ Cost of goods sold)*365 The smaller value of DSI indicates effectiveness in running a business. It also indicates how quickly a company can monetize its inventory. Although it looks simple to calculate, DSI can vary for the same company due to various factors.
- Stock out rates: It usually represents the time when a company runs out of stocks. A high stock-out rates can affect the sales of the company. Additionally, it also decreases customer satisfaction and profitability.
- Carrying cost of inventory: It is the cost associated with holding the inventory over a specific period. It may include the cost of storage and insurance of the product. The longer holding time can result in the product becoming outdated or damaged.
2. Inventory Turnover
The second effective method to analyze the company inventory is inventory turnover. It is used to measure the speed of inventory being utilized over a specific period. Company Inventory is calculated by dividing the cost of goods sold (COGS) by the average inventory value during the same period. Here is the formula: COG/Average inventory value A low inventory turnover ratio is a sign of weak sales or excessive inventory. While a higher ratio is a signal of strong sales, it also indicates inadequate inventory stocking. It is only useful while comparing similar companies and is particularly important for retailers.
Qualitative Analysis Of Inventory
Other than the above methods, there are other various techniques to evaluate company inventory.
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To use them effectively, you need to define the company’s objective first.
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After that, you must collect the data and analyze them to identify the opportunity for improvement. ABC or EOQ analysis are two popular methods that are used for inventory analysis.
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Once you have identified the area of improvement, develop an action plan. Here, you can improve your inventory level, inventory turnover, and supply chain process.
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Now, monitor the process to execute your action plan effectively.
These are the important steps that you can use for qualitative analysis of an inventory. You can make the necessary decisions to improve your inventory management and showcase the truth about your company.
Inventory Analysis Example
If we talk about inventory analysis, it is used in various industries. They use it to optimize their inventory levels and improve their workflow.
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The first example is from the retail industry, where they used to analyze their historical sales. They create a company inventory list to predict the demand for seasonal products. They also use ABC analysis in inventory management to classify their product based on importance and sales volume.
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Second comes the manufacturing industry, where they mostly use the JIT method. Just-in-time inventory is an effective manufacturing company inventory management system. It helps them to ensure the right material they have to meet production demand while minimizing excess inventory.
Other than these industries, fashion, construction, and various other companies use different methods to maintain and manage their inventory level. However, analyzing the inventory of a company is not an easy task. So, you need to automate this process with a software startup company inventory management system.
Inventory Analysis with TranZact
Inventory analysis is an important process for a company to improve its performance in doing business. Analyzing company inventory can help to gain valuable insights on various levels. Cloud-based software like TranZact also helps to track the various inventory. They allow the use of financial ratios to identify the place of the environment.
Company Inventory FAQs
Q1. How to control inventory in a manufacturing company?
There are several methods that you can use to manage your inventory.
- FIFO costing
- LIFO costing
- Economic order quality
- Cycle counting
- ABC analysis
Q2. What companies use inventory software?
The companies associated with manufacturing commonly use inventory software. Through this software, they can track the facility operations for the smooth functioning of the business.
Q3. What is ABC analysis in inventory control?
ABC is a method of analyzing inventory, which is divided into their category.
- First is “A” item where goods are strictly controlled and kept accurate records.
- The “B” item is less tightly controlled and maintains good records.
- The “C” items, where minimal records of inventory are kept.
Q4. What is the difference between cycle count and physical count?
In cycle count, a set of selected items are counted from the inventory. In physical count, all types of inventory are counted at a certain point in time.
Q5. What are inventory books?
An inventory book or bookkeeping system is an on-hand inventory stated in an organization’s accounting records.
Q6. Is stock and inventory the same?
Stock is the finished goods that are ready for sale and are mentioned in inventory. While inventory contains both finished products and the components that are used to make finished food.
