Controlling Inventory and Turnover
For small businesses, controlling inventory isn’t terribly difficult — especially if the owner can simply walk into the storage area and count the number of boxes of supplies or the number of each item that has been produced. The larger the business, however, the bigger the challenge of keeping track of the items available in stores. Even more difficult is tracking what has already been loaded onto the trucks.
Comparing cost inventory and retail inventory
Inventory is counted differently in different situations. The number of items is changed into monetary value by multiplying how many by how much in terms of money. Factor into that the choice between cost inventory and retail inventory and you find that you have options galore. As you can imagine, many decisions need to be made. In general, though, after you choose a particular inventory method, you stick with it and don’t flip-flop around. You stick to one method so you don’t run afoul of the tax people.
Estimating turnover with an inventory ratio
An inventory turnover ratio provides a business with an estimate of how quickly the current inventory is being sold and replaced by new inventory during a particular time period. In general, the higher the number obtained by the inventory turnover ratio, the more often the inventory is sold and replaced.
Inventory turnover is an important measure of management efficiency. For instance, if a business has too much inventory, it’s probably tying up money that could be better used elsewhere. On the other hand, if the company doesn’t have enough inventory, it may lose business if a customer wants immediate delivery when enough of the product isn’t available to fill the order.
FIFO and LIFO: Giving Order to Inventory
Keeping track of items manufactured or purchased and then sold by a company can be a daunting task. Thank goodness for today’s bar codes and handheld devices that make counting and accounting easier and more efficient. And, of course, using technology means that you’ll never have a mistake in your inventory. After all, technology is perfect. Yeah, right!
A company is using the FIFO system of inventory control when it sells to its customers the merchandise that it purchased first. The FIFO system works well for the retailer when costs and prices are rising because the computed profit is greater. The items purchased earlier cost the retailer less, and the price that customers are paying is higher.
Last thought
The Economic Order Quantity, or EOQ, is the optimum number of items to be manufactured or ordered each time a business produces products or places an order for products. The EOQ applies to retailers that need a steady supply of some item and that want to have enough of the item at hand but don’t want to pay too much for shipping or storage. The EOQ also applies to manufacturers that don’t want to pay too much for setup costs and storage of the items.
