Inventory is everything a business has available, either to sell or use. Inventory is a crucial aspect of most businesses: move inventory fast enough, and you’ll usually generate more revenue for your business.
In this article, we’ll uncover a more in-depth definition of inventory, then reveal the best inventory management definition, inventory control definition, physical inventory definition, perpetual inventory system definition, and inventory system definition. These definitions can help you better understand your inventory and how it affects your business’s bottom line.
Inventory is a robust, complete list of everything a business has got in stock, even if it’s stored remotely or is not yet ready to be used or sold.
A management company inventories the properties it maintains. A baker inventories all the varieties of flour she keeps on hand. A pharmacist’s inventory details not only every medication on the shelves but also the supplies required to fulfill customers’ prescriptions.
So, what is the meaning of inventory? Sometimes referred to as stock, inventory can either be sold to a customer directly or indirectly or help a business carry out services.
Inventory Asset Definition
Inventory assets are items that a company intends to sell for profit. These items can be any classification of inventory, from raw materials to a finished good. Inventory assets are considered business assets and should be carefully tracked on an inventory list or using inventory management software.
Inventory is an essential element of many businesses—and often, inventory is one of a business’s most valuable assets. Because a business can have so much cash tied up in inventory, practicing smart inventory management and tight inventory control is absolutely essential. All of that, of course, begins with a good inventory list.
Inventory List Definition
Inventory lists are exhaustive, detailed reports of every item your business stocks.
Of course, an inventory list is so much more than a list of items. Inventory lists also reveal essential details about each product, including where a given item is currently located. These lists should be full of important details, from location and purchase price to condition and supplier information.
Here are some suggestions for what to include on your inventory list, which can be kept via pen and paper, a spreadsheet, or inventory management software.
- Amount in Stock
- Purchase Price
- Product Link
- Expiry Date
- Warranty End Date
- Model/Part Number
- Supplier Information
- Relevant Attachments
Some information, like pictures and attachments, can be super difficult to track on spreadsheets or paper inventories. Apps for inventory can help you record essential information, even if it doesn’t fit neatly into a stubborn cell.
Inventory Management Definition
Inventory management is the process of ordering, organizing, storing, and using up inventory. No matter what your company stocks, inventory management is key to keeping your business’s operations running smoothly. To truly understand your inventory, your business should practice inventory management consistently.
Whether your business is a massive enterprise or a tiny startup, practicing sharp inventory management is essential to your company’s productivity and profitability. There are many different wants to manage your inventory, including using pen and paper, entering data into a spreadsheet, or utilizing inventory management software or an inventory app.
So, what type of inventory does your business stock? Check out the four main types of inventory and their definitions to be sure:
Types of Inventory Definitions
There are many types of inventory. In manufacturing, the four most common types are raw materials, work-in-process (WIP), finished goods and maintenance, repair, and overhaul (MRO).
Raw Materials Inventory Definition
Raw materials inventory refers to everything a manufacturer has in stock but has not yet been used for a project (work-in-process) or a finished good.
Work-in-Process Inventory Definition
Work-in-process, or work-in-progress inventory, includes raw materials plus labor and overhead costs. It’s more of a “big picture” look at inventory costs since it accounts for things like packaging and preparing items for use or sale.
Finished Goods Inventory Definition
Finished goods refer to inventory that is completely ready to be sold or used.
Overhaul Inventory Definition
Overhaul inventory, also known as maintenance, repair, and operating supplies, refers to all the inventory needed to complete finished goods. From light bulbs to labels, every little thing you need to keep your business running smoothly can be categorized as MRO inventory.
Inventory Control Definition
Inventory control is the practice of ensuring a business has just the right amount of inventory to meet customer demand while keeping associated holding costs as low as possible. Also known as stock control, inventory control helps businesses keep their customers satisfied and their cash flow secure.
To practice tight inventory control, businesses need to select and stick with a winning inventory management system. Whether they choose an app, a sheet of paper, expensive software, or a simple spreadsheet, they’ll need to make the right decisions about what to stock, how much of it, when, and where.
There are a ton of inventory control formulas, concepts and ratios that can help business owners, managers and employees make solid decisions about reordering inventory.
Some of these concepts include:
- Economic Order Quantity, which reveals how much inventory you should order to keep costs low but customer demand satisfied
- Reorder Point Formula, which indicates when you should reorder inventory
- ABC Analysis, which classifies stock by how important, prolific, and profitable it is to your business
Physical Inventory Definition
Physical inventory occurs when a business physically counts everything in its inventory.
Sometimes, corporate guidelines, tax regulations, or standard operating procedures require businesses to conduct physical inventory. Some businesses—like restaurants—take physical inventory every morning, whereas others, like a retail store, may close quarterly or annually for physical inventory.
Some businesses hire an inventory services provider to count inventory more efficiently. Other business owners use inventory management software with QR code/barcode scanning to automate the inventory process.
If a business performs physical inventory bit by bit, that’s called an inventory cycle count. For example, a sporting goods store may count shoes on the first day of the month, but exercise equipment on the 5th. This can help a business reduce or eliminate the need to close to take physical inventory.
Perpetual Inventory Definition
Perpetual inventory occurs when changes to inventory are accounted for immediately. Through the use of an app, scanner, point-of-sale system or other device, any status change to an item is reflected in the inventory management system at once.
Inventory management software—including inventory apps like Sortly—make perpetual inventory a breeze. You can use the built-in QR code and barcode scanner on your phone to instantly add, remove or edit inventory.
Sortly is a modern inventory app that’ll help your business stay organized, for good.
Ready to modernize how you manage your inventory? Get your business organized with Sortly. Start your free trial today!