Inventory Management

Inventory’s other names are goods, stock or products of company. 80% of business transactions are relating to purchasing and selling of inventories. Inventory can divide in raw material, work in progress and finished goods. For continuing production, it is very necessary to manage inventory management because without inventory management, it may possible that there is no stock in store and without stock of raw material our production may delay. But the sense of inventory management in finance or financial management is advance and it is the part of working capital management. In finance, it is the money of investment. So, proper inventory management is very helpful to provide good return on the investment in inventory.

I want to take your attention on following facts which are needed for proper inventory management.

1. In inventory management, we maintain the stock register which used to track what quantity is sold at what price.
2. We have to calculate proper financial statement by using first in first out method of calculation the value of inventory or any other method of valuation of inventory.
3. Proper inventory management tells you different stock items closing stock at its cost. I can explain it very simple example. Suppose, you have started your own VCD business. You have produce 100 VCDs by using your own computer and appoint your salesman to sell this 100 VCDs but your salesman sells the only 2 VCDs. Then, you can calculate cost of goods sold by using your own calculator but in very large institute where 100000 or more VCDs raw materials are purchased and then these VCDs are produced and sold by salesmen. At that time, proper inventory management will tells you what quantity of raw material you should keep by using reorder level. It also tells you that what amount should be used for purchasing of raw material and what quantity, we should be produce and keep as finished product. After selling, what amount of profit, we have to receive from each salesman.
4. Some decisions are also taken relating to reducing the stock conversion period in inventory management. Stock conversion period is the period when stock is converted into sales. Less period is better from financial point of view.

Importance of Inventory Management

Inventory management is very important for making company’s sales, strategic, production and financial planning. An inventory manager should aware that inventory, its quantity, its cost, its rates and price because inventory is effected large number of factors. So, it should be based on flexible approach, so that company can change its design according to changes in inventory market.

With effective inventory management, production and sales department can work to know inflow and outflow of material. This information can be very useful for management to reduce working capital in the form of inventory, because raw material, work in progress or finished stocks are the block of money and fund. But management should not forget that at the time of inflation to purchase high quantity can give us earning due to increasing prices of same raw material within short period of time. With proper inventory management, we can create balance between supply of raw material and demand of raw material.

Main Techniques of Inventory Management

1. Material requirement planning
2. Inventory control
3. Godowns Management techniques
4. Purchase management
5. Sales management
6. Product Expiry dates and obsolescence management


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Accounting Education: Inventory Management
Inventory Management
Accounting Education
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