There is nobody that does not have a good reason for starting or doing a thing. The only issue here is that we all have different reasons for doing things. For instance, if you run a business or read about businesses you would have heard about inventory. This is an accounting term that simply means assets of a business. Similarly, there are reasons for holding inventory in an organization. For example, if you are a manufacturer, part of your inventory is the raw materials and finished goods that you are yet to sell.
Furthermore, in this post, we will give you the top reasons for holding inventory in any organization. Let us explore that immediately.
- 1 What is Inventory?
- 2 Top Reasons for Holding Inventory
- 3 Types of inventory
What is Inventory?
We can define inventory as your assets which are in line with what you produce with the aim of selling it to your customers. For example, a cream manufacturing company cannot have furniture as its inventory. Its inventory should be what is related to it and what it produces. In this case, it will be things like cream labels, bottle covers, bottles and so on are the inventories of cream.
Top Reasons for Holding Inventory
It helps you track goods that are available for sale
As a business, when you take inventory regularly, you will know the goods that are available in the warehouse. Also, the problem of some goods not being available when customers want to buy them will reduce. Furthermore, you pass the message to your customers that they can rely on you to get goods anytime they wish to buy from your shop. This is a positive feeling for your business and a good impression for your customers.
It helps you buy in bulk and save money
Holding inventory helps your business to buy goods or raw materials in bulk and helps you to manage logistics too. For example, when you buy in bulk the organization you are buying from will sell at the best price to you giving you good discounts. Also, the transportation cost will reduce as the seller may have the provision of transport for large buyers as further incentive to attract and keep buyers. Therefore, from this point, you can see that buying in bulk to save money is one of the reasons for holding inventory.
Meeting customers’ demand on time
The success of any business depends on its ability to sell to its customers on time. And equally, meet their demand. Also, when a customer is satisfied with the service you render, he or she will be happy to come again. As you are aware, it is satisfied customers that will tell others how quickly you sell to them. Also, it is their testimony, that would bring more customers for you to help you grow the business.
Holding inventory helps you to know the right time to make purchases
There is a time to everything in life general. For instance, we have Summer, Winter, Spring, and Autumn. Each of these seasons one way or the other could affect the Supplies and Purchase of goods in different businesses. So, as a business in other, for you not to run at a loss, you must take note of different Seasons to know whether to increase or reduce the inventory you have in your warehouse. So, knowing the right time to buy, is part of the primary reasons for holding inventory in a firm.
For instance, if you are an Umbrella manufacturing company, you would make more Umbrellas during the rainy season than in the dry season. Why do you do that? Well, you do so to take the opportunity of the usual high demand of Umbrellas during the rainy season.
Base your product on low-cost offers
Money is very important in business. Hence, the need to manage your capital is vital for you to remain in business. When you have low-cost offers from your customers, it means your business’s cash flow is tied up. Always make sure you have working capital available. However, the only good part is that when you buy at a low cost you will reciprocate by selling at a low cost to your customers.
A good management
Holding inventory is very important because it gives you the proper management of your product. You can be able to analyze the time, forecast inventory with accuracy.
Types of inventory
As we think about the reasons for holding inventory, it will be good we list the several types of inventory you can have as a business so that we are all on the same page. The list is as follows:
- Raw materials: This type of inventory is items that are used up in the manufacturer’s conversion circle. For example, you use raw materials to process subassemblies or finished products. Examples of raw materials are paper, wood, paint, steel, etc.
- Finished goods: These are goods that are ready for customers to use as finished goods. Also, the goods must be inspected and confirmed as ready for sale before you actually sell it to the customers.
- Transit inventory: This type of inventory can also be classified as a purpose. It also deals with transporting the goods from one location to the other.
- Work-in-progress: This comprises of all materials, from a part, assemblies, and subassemblies.
- Buffer inventory: An unpredictable event such as poor delivery or quality of a product is protected by the buffer inventory. So, you should keep a large Buffer inventory deal with any eventualities that may arise.
- Anticipation inventory: You keep this type of inventory to anticipate future shortages or need so that you are able to meet it easily.
In conclusion, we have shown you the reasons for holding inventory in an organization. We have also explained and listed the types of inventory a business should have. Furthermore, from what we have discussed so far, we can rightly say that if you can follow all the laydown reasons, you will be able to manage inventory for your business with ease.
Also, kindly send a comment on what we have shared so far in the post.