Inventory is held by an organization in the form of sellable products or in the form of raw materials used to produce the sellable products. Every organization that deals with selling, manufacturing, or reselling any products can hold inventory. The particulars or the products termed as inventory also have a monetary value. Since it has a monetary value, the same is included in the books of accounts that the organisation maintains.
Inventory Management :
Inventory management is one of the significant tasks performed by top level of management. In case the inventory is exceeded than what is needed, the same results in an increase in the cost of maintaining the inventory and also results in a blockage of the working capital used for the daily operations. In the same way, a company cannot afford to have less inventory than that of what is needed, it will affect the organization’s market share, which will profoundly affect the firm’s profit margin. In such cases, if a company is not able to fulfill the demand for a particular product due to the non-availability of inventory, it is not a positive sign on the part of the organization. It is also vital to keep an eye on the level of the inventory and the same level it to be maintained throughout. Generally, all the organizations tend not to hold inventories; however, exceptions are always there.
Holding Inventory results in hidden problems:
The problems that arise from holding inventory are not visible at the base levels but arise on the managerial levels. An organization generally levels up the inventory to cover up the inefficiency of the suppliers when the supplier of the raw materials or the semi-finished products is not reliable, or the product of the semi-products is not consistent. Only the management tries to hold excess inventory. The Financial Controller holding finished product or semi-finished products as inventory arises in the form of worry as it increases the cost of maintaining the inventory. The working capital of the firm is also blocked. Inventories that are kept idle for a longer period might also become outdated or are often shrunk, lost, or even stolen.
Cons of Holding Excess Inventories:
- The more inventory an organization holds, the more significant is its cash flow, and it also blocks the amount of working capital used in the day-to-day operations.
- The value of the inventories goes on decreasing depending on the period for which it is held. The inventory should be used based on last in first out as the inventory should be sold in the tenure in which it is new for the people and attracts them to buy the same. In the case of Smartphones, the model gets updated in almost every two to three months in such a case it is not valid to hold inventory; rather, the products should be sold before a new model arrives. In the case of perishable products, the inventory should not be held for a longer period and should be sold before the product rots or expires. Due to hoarding, many sellers have to sell at cheaper rates as their stocks get obsolete.
- The stock is always at a risk of being damaged by any natural calamities, such as floods, fire, etc. In case the inventories held are lesser in value, then the recovery costs would also be lower.
It is preferable to keep additional inventory, but then holding additional inventory leads to subsequent losses. Every organization should make sure that the level of inventory should always be up to the mark. Nowadays, many applications have come up features that help in inventory management of the organisation