What is inventory valuation?
There are many overhead expenses you may have heard about or ones that you are already aware of but when you allow them to spiral out of control, it can seriously jeopardize your business and your ability to save money and put it back into the company for other needs. Understanding what these wastes are will allow you to start saving money. One of the biggest wastes a company can have is inventory. Keeping a small stock on hand is the best way to have products ready for the customers when they need them and will allow you to avoid dealing with products that take up a ton of wasted space and start losing value as they sit on the shelves for too long. To help you understand more about your inventory and how you can control its costs, continue reading along.
What exactly is inventory?
Let's start by explaining what inventory actually is. This is all the products that you manufacture and set aside to be sold for the customers. Many times inventory will start to stockpile if companies are producing too much of a single product and not selling it in a timely manner. These assets need to be sold in order to make money for the company and for a company to be productive you need to make sure you are selling your inventory load within a week to two weeks of it being produced. Hanging onto a product for a month or longer can start to cause the product to lose its value and you won't be able to earn as much from it when you try to sell it to your customers.
Understanding Inventory Valuation
This is a process that can be implemented in order to help you understand the inventory and to focus on reducing the costs associated with it. You will have a statement that shows you the various areas of inventory and how to understand the wastes that are occurring within your inventory. Many companies will follow a valuation method that works by using the first in, first out method. What this means is that all of your supplies that come in first will be given a priority to be produced and sold first. Most companies that follow this method deal with perishable items so they must sell them quickly to avoid losing value on these products. Other companies will sell a good based on its tax value while others will stockpile goods because they worry about losing money on them due to an economic problem and other situations that arise.
Using Inventory Valuation
Now that you can see somewhat how inventory valuation works, you can focus on how to make it work within your company. Start with your inventory starting point and then look at how you can present the transactions for the organization. It's all about discipline and proper planning in order to make inventory valuation work effectively. You have balance sheets that help you to see the financial status of the company and then you will also need to worry about how many sales need to be made each month in order to sell off the investment you have made into your inventory. Companies with investors need to focus on inventory valuation often because it shows investors how their investments in the organization are looking and what type of things may need to be considered like economy struggles and so forth. Updating these sheets helps investors to continue giving money or may cause them to call in their loan. This is why it is so important for you to understand your inventory and to maintain control over it.