Financial Terms / inventory

Managing Inventory Costs and Assets

Inventory is an important asset that companies must manage carefully - from raw materials used in production, to finished goods and merchandise, to supplies. It must be monitored and valued using the cost of the earliest purchased materials in order to minimize costs.


Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold

How do I calculate the inventory?

It is important to regularly calculate your ending inventory in order to properly calculate your business's net income. One of the best ways to do this is by manually counting the inventory available at the end of the accounting period. To calculate the ending inventory, use the following formula:  Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold 

You can use programs such as Sourcetable to make the process easier.

What is inventory management?

Inventory management is the process of tracking and organizing the movement of goods from a supplier to a customer. It includes the tracking of materials, the tracking of products in stock levels, the tracking of orders and shipments, and the tracking of inventory turnover.

What are the benefits of inventory management?

The benefits of inventory management include better control over inventory, improved customer service, increased profitability, and better management of inventory costs.

What are the components of inventory management?

The components of inventory management include inventory control, inventory tracking, inventory optimization, and inventory forecasting.

What are the key questions to ask a fulfillment partner?

The key questions to ask a fulfillment partner include: 
  • What are their inventory management processes?
  • How often do they update inventory levels?
  • How do they track orders and shipments?
  • What is their inventory turnover rate?
  • What is their customer service level?
  • What is their returns process?
  • How do they handle inventory replenishment?
  • What inventory optimization techniques do they use?
  • What is their process for tracking inventory costs?
  • What is their strategy for managing inventory risk?

What is the formula for calculating inventory turnover?

The formula for calculating inventory turnover is Cost of Goods Sold / Average Inventory.

Key Points

How do I calculate inventory?
Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold
Acquiring Raw Materials and Components
Inventory management includes acquiring the materials and components needed to produce products. This includes acquiring raw materials from suppliers and components from manufacturers.
Just-in-Time Management
Just-in-time management is a manufacturing model that seeks to reduce inventory costs by ensuring that products arrive exactly when they are needed. This method seeks to reduce the amount of time, effort, and money spent on storing and maintaining inventory.
Materials Requirement Planning
Materials requirement planning is an inventory management method that seeks to determine the materials and components needed for production and the timing of their acquisition. This method helps to optimize the utilization of resources and minimize inventory costs.
Economic Order Quantity
Economic order quantity is an inventory management method that seeks to determine the optimal order size and timing of orders. This method seeks to minimize inventory costs by finding a balance between ordering too much and ordering too little.
Days Sales of Inventory
Days sales of inventory is an inventory management method that seeks to measure the average number of days it takes for inventory to be sold. This method helps organizations to better manage their inventory and determine the best ordering strategy.

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