Inventor y is a high stake activity in any manufacturing or retail based organization. Overstocking or understocking of goods can cause heavy losses to the organization. Stock-taking activities are an important part of the inventory management mechanism. It involves the periodic physical counting of the stocks of goods and analyzing the difference in the stock count between two different accounting periods. Any difference can lead to an increase or decrease in the inventory value. The inventory which has been physically counted during stock-taking is often referred to as closing balance. The opening balance is the inventory count as per the inventory records and the difference between the opening balance and closing balance is divided into one of the two categories namely; inventory shrinkage or inventory profit.
Inventory Shrinkage is the amount of goods that are found missing from the inventory during the physical count. This difference can be attributed to various factors like pilferage, obsolescence, or faulty counting during stock-taking. It is a great loss for the organization and requires proper investigation.
On the other hand, Income from inventory is the amount of goods that are found additional in the inventory during the physical count. This difference can be attributed to several factors like late deliveries, a difference in supplier’s estimates, or better forecasting models used by the organization.
Inventory turnover is a metric used to measure the effectiveness of the organization’s inventory management. It calculates the number of times inventory is sold over a given period. This is calculated by dividing the total cost of goods sold by the average inventory over the same period.
Having discussed the definition, let us understand the main reasons of inventory profit.
1. Better Forecasts: Accurate forecasts enable inventory managers to purchase the exact amount of goods that are needed at any particular time. This prevents the organization from over or under stocking of goods.
2. Efficient Updating: Regularly updating and maintaining inventory records enable managers to quickly identify inventory gains or losses.
3. Improved Logistics: Efficient logistics management helps in efficient inventory movement across warehouses and shops.
4. Reduce Wastage: Inventory profit helps in reducing wastage by providing an accurate picture of stock levels and reducing obsolete items.
Inventory profit is a very important aspect of effective inventory management. It helps the organization to benefit from gains or loss in stock values thus resulting in cost savings. It helps in cutting operational costs, reducing wastage, and improving customer service by maintaining the right amount of stock at all times. However, it is important to remember that inventory profit can also lead to losses due to mismanagement or improper accounting methods. Therefore, it is important to monitor stock movements and ensure that proper checks and balances are in place.
