How Inventory Affects Your Company’s Financial Performance

A business’ inventory includes raw materials, components, or finished products that a company sells or uses in production. Meanwhile, inventory management means monitoring how stocks are obtained, stored, and used to run the business. Inventory management is crucial whether you are operating a small or a large-scale company.  

Without inventory management, you will not be able to keep up with the number of stocks and supplies to operate your business. Having low stocks may result in delays in production and delivery. On the other hand, having too much stock affects your cash flow as it may entail costs for space, manpower, insurance, interest charges, etc. 

An effective inventory management not only helps to solve issues regarding a company’s liquidity, but it also helps boost its profitability. It’s made more accessible and more efficient by using an inventory management system. The system helps update inventory, make adjustments when orders come in, and make sales. You can obtain a plan that best suits your business from reputable companies specializing in manufacturing inventory management software

This article will highlight the ways inventory affects a company’s financial performance. Read on to learn how.  

  1. Working Capital 

Working capital is current assets minus current liabilities and increases as income statement inventory increases. Therefore, it’s essential to ensure that the inventory reported in your financial statements is accurate. Making better financial forecasts by not having too much or too little inventory will help your company’s profitability.  

  1. Income/Profit 

Errors in inventory calculations have effects that trickle down to profit and revenue. Your inventory may be inaccurate for various reasons, including damage during shipping, failure to add returns, or older items that should be sold at a discount. You can correct such issues by regularly adjusting the inventory to the proper value. 

It’s possible to generate high profits by maintaining low inventories of finished products by implementing efficient manufacturing processes. 

  1. Balance sheet 

Changes in inventory and incorrect balances affect the balance sheet—a financial statement that summarizes a company’s value based on assets and liabilities. Wrong stock can result in inaccurate reporting of assets and equity on the balance sheet even though liabilities are not affected. Inaccuracy of asset reports may draw setbacks to the company’s financial performance. 

  1. Inefficient Logistics and Losses 

Inefficient inventory management can lead to losses in various ways, including losing stock if not adequately monitored and stored. It causes a deduction of costs that a company cannot recover.  

Inefficient logistics is a massive blow to a company’s finances because it leads to a poor reputation and, eventually, loss of customers. An example of poor or inefficient logistics is when a customer returns a product and asks for a refund because they didn’t receive what they ordered. It translates to a loss of revenue. 

  1. Excess Inventory And Cash Flow 

Excess inventory has its share of problems. It gives a company the responsibility of devising long-term strategies to manage it, which may be challenging. When companies spend a fortune on products and are unable to translate them into profit, it automatically becomes a loss. This will also lead to an excess inventory, which creates new costs, like more storage space and personnel to manage it. 

Manager man worker doing stocktaking of product management in cardboard box on shelves in warehouse. Physical inventory count. Male professional assistant checking stock in factory.
  1. Inventory And Indirect Costs 

A company’s financial performance can be affected by paying out monies in the form of indirect costs. These costs may include labor fees for stocking new inventory, storage space charges, and human resource funds to take care of additional workers. If there’s no proper inventory tracking, the company will run excess costs, which is a disadvantage to financial performance. 

  1. The Accurate Valuation Of Assets 

Valuing your assets accurately as a company is one thing, but using a consistent method in the valuation process is another. Using a single method consistently will help you see the bigger picture of your company’s financial performance. You achieve accuracy and meet compliance requirements with proper current assets, total asset balances, and actual inventory. 

  1. Increased Responsiveness 

A company’s financial performance increases by reducing inventory, such as raw materials, partially manufactured products, and finished goods. When a company can reduce inventories of partially manufactured goods, that will lead to reduced finished products. Such a scenario enables the company to respond better to demand, especially goods with short manufacturing cycles like electronics.  

  1. Inventory Analysis Method 

A company’s method of accounting for inventory can affect its financial performance. Frequent changes in the technique used to analyze stock could mean that a company is having challenges selling finished goods or is facing inventory obsolescence. Hence, it is crucial for a company to guarantee an effective inventory analysis method that will provide accurate data for the business to operate smoothly. 

In Conclusion 

Inventory management is imperative to your company’s financial performance as it serves as a map of the goals you want to achieve. It helps you to address the challenges of having more stock than you can sell and not having enough to meet orders. It also allows you to monitor the source of losses and manage resources efficiently. In a nutshell, proper inventory tracking sets your company on a higher level of financial performance. 

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