The short answer to this question is: no, inventory and stock are not the same thing. Though many people use the two words interchangeably, they actually have different meanings. We’re not just being picky over semantics here either.
Understanding them correctly will help you manage your business more efficiently – and that’s crucial in a business. With that in mind, we’ll explain what’s what!
What is classed as stock, and what counts as inventory?
Stock is the finished product that you sell to your customers. Simple. Inventory includes the items that you sell to customers, as well as the goods, equipment and materials you use to produce the sale.
For instance, an empty hotel room that you need to repaint in order to sell out to customers by the night, or the hand tools you use in your workshop. Inventory can be split into four categories, including your saleable stock items.
As the title suggests, these are the basic materials and components you need to make your final product. They’re the building blocks from which your saleable items are built.
Maintenance, Repair and Operating Supplies (MRO)
This is the stuff you need to support production. MRO supplies can include everything from large equipment and machinery, to smaller items such as safety apparatus, hand tools, and computers.
Work in Progress (WIP)
These are the goods that are still in production. They’re not yet complete products ready to be sold, they’re a Work in Progress. For example, edible goods that need to finish fermenting before you can sell them. WIP also includes the raw materials, labour and overheads that go into making the production process happen.
How are stock and inventory different?
When it comes to understanding stock and inventory, it’s less about them being different and more about being specific. Whilst stock sits within your inventory process, the different types of inventory are the other cogs in that process. They’re interlinked, but not interchangeable.
Why it’s so important to keep track of stock and inventory
No matter what your business provides to its customers, you need to have the resources which allow you to do this. Balancing them is the key to helping your business operate efficiently.
Overstocking on raw materials might leave you with storage issues (and storage costs which will chomp into your profit). Tying up your cash in overstock can also restrict your cash flow until you make sales. On the flip side, fail to act on low inventory levels in enough time, and you might be left with nothing to sell and a lot of very disgruntled customers.
Neither scenario is ideal, but keeping track of your inventory and stock control can help you avoid them. It means you’ll be able to use your other financial data, such as sales reports, to predict trends so you can make more informed decisions about managing your items. Stellar stock organisation also helps support:
More accurate cash flow forecasting
If you spend a load of cash on excess stock that you won’t sell straight away, there’s less money available for other areas which need attention. This could then lead to cash flow struggles which skews your future cash flow forecasting. For businesses of all shapes and sizes, every penny really does count – but hey, you don’t need us to tell you that.
Striking the perfect balance can be tricky especially for small businesses who rely on sales income to make their next order, or start-ups still getting to grips with understanding demand. Getting a feel for how inventory cycles through your business (and when) helps you provide for your customers in a timely fashion. It can make the difference between a happy customer or a negative online review.
Holding items in bulk is tempting, especially if you get a bulk discount, but it does mean you run the risk of being left with things you can’t shift. This then inevitably leads to wasted stock (and money) or having to run discount sales, which could damage the identity of your brand.
On the flip-side, keeping lower levels of stock – or even operating on-demand – comes with the risk of running out and leaving your customer empty-handed.
You might build a buzz but long-term availability problems usually means customers are less likely to remain loyal to your business. Quantity of stock is a sweet spot all business-owners need to find. Just don’t let it detract from the importance of quality too – but that’s a topic for another day. (OK we can’t help ourselves; don’t forsake your standards to meet demand faster.)
Lowering the risk of theft
Having a large amount of inventory means keeping it somewhere safely until you sell or use it. Whilst some items are meant for the long-term (such as equipment), the longer you have surplus items, the higher the risk of theft or damage.
Theft can happen from outside, but also from inside the business. Naturally, you’re only going to employ staff that you trust and can rely on, but as a business-owner it’s important to put emotion aside and think with a low-risk mentality.
There are various insurance policies you can invest in to protect you from the effects of stock theft or damage. Whilst we highly recommend insurance, just remember that the more cover you require, the more cash you’ll have to spend.
Reducing space requirements (and overheads)
Not only does more inventory mean more insurance cover and more cash, it also means more space. If you’re storing items on-site, this might affect the amount of usable space you have to actually work in, which in turn can impact your ability to make sales. For instance, a small bricks-and-mortar shop made smaller by the need to store your raw materials, or your massive stationery supply affecting how many staff you have room for.
Off-site storage means additional costs that you might otherwise be able to avoid, as well as the inconvenience of moving items between sites. There’s also the question of security. Getting to grips with the right levels of stock for your business will steer your inventory in the right direction, and reduce the need for unnecessary spillover storage.
Log stock levels and inventory as you go
From raw materials and MRO, right through to sales and returns, record your inventory along the way. You might need to devise systems which help you do this, or use software that helps you keep track. Pandle’s Items feature can help you monitor the items in your business, and as part of your bookkeeping too.
Taking steps to manage your inventory helps you to nurture that all-important cash flow. You’ll be able to make more accurate forecasts, reduce waste, and spot patterns that require attention.
It’s important for all businesses, but particularly essential for those of you trading perishable goods such as food, drinks or natural skincare. The last thing you want are shelves full of out-of-date goods that you can’t even give away, never mind sell for a profit!
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