Four methods you can use to manage your company's inventory
Working capital is made up of debtors, creditors and inventory otherwise known as 'stock'. If this isn't managed properly, you could find yourself with a cash flow crisis in your company. Read on to discover four methods you can use to manage your company's inventory to avoid a cash flow crisis.
For a manufacturing business, 'stock sometimes called inventories in the form of raw materials, work in progress and finished goods could make up a substantial proportion of your business's total assets,' says the Practical Accountancy Loose Leaf.
If your company's inventory isn't properly managed, you'll be hit with a cash flow crisis. For example, a large sum of money can be tied up when you buy stock, but if it doesn't move quickly enough the cash that could be used for the lights bill will be up unnecessarily.
Your company can avoid this with a proper inventory method in place…
Manage your inventory using these four methods
The standard cost method. Your company can use this method if the standard costs approximate actual costs. Just remember, 'standards must be regularly reviewed and, if necessary, revised in light of current conditions,' says the Loose Leaf. With this method, a standard price is established for each stock item.
The first-in, first-out (FIFO) method. Inventory purchased or produced first is sold first. This means that the items still in inventory at the end of the period are those purchased or produced most recently.
The weighted average method. The cost of inventory at the end of the period is determined from the weighted average of the cost of items at the beginning of the period and the cost of items purchased or produced during the period.
Specific identification of costs. Use this for inventory items that aren't ordinarily interchangeable. For example, if you have a variety of different products. 'This is the appropriate treatment for items that are separated for a specific project, regardless of whether they're bought or produced,' says the Loose Leaf. With this method, each item of inventory is valued at its specific cost.
With these methods in place your company will be able manage inventory better and avoid a cash flow crisis.