Inventory refers to the goods or materials held by a company for sale, in the process of production, or for use in its operations.
It represents a key assets on a company's balance sheet and forms part of a company’s working capital.
Common types of inventory include:
1. Raw materials: These are the basic materials and components that are used in the production process but have not yet undergone any manufacturing or processing.
2. Finished goods: These are the final products that are ready for sale and have completed the production process.
3. Merchandise inventory: This type of inventory is typically found in retail businesses and refers to the goods that are purchased for resale to customers.
Inventory management is crucial for businesses to ensure smooth operations and meet customer demand while minimising holding costs and potential losses.
Effective inventory management involves activities such as forecasting demand, implementing just-in-time (JIT) inventory systems, conducting regular inventory counts, and analysing inventory turnover ratios to optimize inventory levels.
Proper inventory management helps companies avoid stockouts, reduce carrying costs, minimize obsolescence or spoilage, and maintain a healthy cash flow. It also plays a vital role in meeting customer expectations, improving operational efficiency, and supporting overall business profitability.
Work in progress (WIP) refers to goods; products; and / or services that are in the process of being manufactured; assembled; and / or serviced but not yet completed.
Some examples of work in progress in different industries include:
1. Manufacturing: WIP represents products that are being assembled, fabricated, or processed but are not yet ready for sale.
2. Construction: WIP refers to ongoing construction projects that are not yet finished.
3. Software development: WIP refers to partially completed software projects or applications that are undergoing development and testing before release.
4. Service industry (i.e., consulting and professional services): WIP represents projects; assignments; and engagements that are in progress but not yet completed.
Monitoring and managing work in progress inventory is crucial for companies to maintain operational efficiency, meet production deadlines, and optimise resource utilisation.
By measuring WIP, businesses can identify bottlenecks, manage production capacity, allocate resources effectively, and streamline the production process to minimise delays and optimise productivity.
WIP Days and Inventory Days is calculated as follows:
(Average WIP or Inventory / Cost of Goods Sold or Cost of Services Sold) * Number of Days
If you wanted to calculate the average amount of days that it took for your business to sell / turnover its services of inventory:
Inventory / WIP 30 June 2022 $250,000
Inventory WIP 30 June 2023 $225,000
Total Cost of Goods / Services Sold $2,500,000
($250,000 + $225,000) / 2 / 2,500,000 * 365 = 35 days.
Generally, the smaller the number of days the better.
If you would like to discuss further, please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au
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