What is inventory? Inventory is everything you possess in all of your warehouses, stores, and other locations. It includes not only the finished products you intend to sell, but also two other key types of items that are necessary to keep your business running.
Here are the three types of inventory:
Parts can be anything from nuts and bolts to flour and sugar. They are any items that can be used to create a finished good, but they will not be sold in their current form. Basically, parts are the raw materials you need in order to make products, so it’s important to keep track of them. But they must be changed or used in some manner to make them more valuable to customers. After all, a computer company wouldn’t ship a motherboard, hard drive, and other equipment to customers and expect them to assemble a computer themselves.
Products are the end result of putting together a number of parts. Products can be customizable, so you can add different parts depending on customers’ preferences. They come in all shapes and sizes, from baked goods and frozen ice cream to expensive electronics and vehicles. Obviously, different products have different shelf lives and require varying amounts of storage space. These are all factors that need to be taken into account when deciding how many products to have on hand at any given time.
Assets are different than parts and products, both of which are intended to be sold at some point. Assets are items (such as heavy-duty manufacturing equipment, brooms, paper towels, work uniforms, shelves, and vehicles) that are meant to be used in the day-to-day operations of a business, but not to be sold. Sure, they can wear out and be sold or scrapped at some point in the future, but that’s not their primary purpose. Assets make it possible to produce, hold, move, and eventually sell parts and products. If you’d like to delve even deeper into this topic, check out this article on FitSmallBusiness.com to learn what an Asset Turnover Ratio is and how to calculate it.