Inventory Management: The Money Sitting on Your Shelves

Inventory is more than the products sitting on your shelves. For many businesses, a significant portion of their working capital is tied up in stock, making effective inventory management essential to cash flow, profitability and business growth. From knowing when to reorder and how much to purchase, to valuing stock and identifying slow-moving products, the way a business manages its inventory can determine whether its money is working for the business or simply sitting idle.

For many businesses, inventory is simply viewed as the goods sitting in a warehouse, store, or shelf waiting to be sold. But inventory is much more than that. It represents a significant portion of the resources invested in keeping a business running.

For example, on average, about two-thirds of a manufacturing business's working capital may be tied up in inventory, while retailers and wholesalers can have as much as 90% of their working capital invested in stock. This means that how well a business manages its inventory can have a significant impact on its efficiency, cash flow and profitability.

For manufacturing, wholesale and retail businesses especially, inventory can make up a substantial part of current assets. This makes the question, “How much stock do we have?” almost as important as “How much money do we have?”

Imagine a retail business that frequently runs out of its best-selling product. Customers may eventually look elsewhere, leading to lost sales and dissatisfaction. Now imagine another business that keeps purchasing more stock than it can sell. Its money becomes tied up in slow-moving or obsolete inventory, while storage and handling costs continue to accumulate.

Both businesses have an inventory problem, just in different directions.

This is why effective inventory management matters.

The Purchase Should Start Before the Purchase Order

Inventory management is not simply about counting what is available. It begins long before a purchase order is raised. It starts with making informed purchasing decisions.

Before placing a new order, a business needs to understand what it currently has in stock, what is selling quickly, what is moving slowly, when existing stock is likely to run out and how much should be ordered.

This is where the purchasing function becomes important to cost control. Buying too much may tie down valuable working capital, while buying too little can result in stockouts and missed sales. The supplier also matters. Price, product quality, reliability, delivery time and payment terms can all influence the actual cost of a purchase.

For larger organisations, these responsibilities may be handled by dedicated purchasing, store or inventory departments. For smaller businesses, the owner or a few members of staff may handle them. Regardless of the structure, the principle remains the same: having the right product, in the right quantity, at the right time and at the right cost.

Knowing the Value of What You Have

Managing inventory also requires a business to know what its stock is worth. This is where inventory valuation becomes important. Inventory valuation is the process of determining the financial value of goods held by a business. It helps the business understand how much of its money is currently tied up in stock and also affects financial reporting and the calculation of profit.

Businesses also need to determine when and how much stock should be replenished. This is where inventory control levels come in.

A minimum stock level is the lowest quantity of an item a business should ideally hold before taking action to replenish it. The maximum stock level, on the other hand, represents the highest quantity the business should normally keep, helping to prevent excessive investment in stock. Between these levels is the reorder level, the point at which a new order should be placed so that fresh stock arrives before the existing supply runs out.

But how much should a business actually order?

This is where Economic Order Quantity (EOQ) can be useful. EOQ is a method used to determine an appropriate quantity to order by balancing the cost of placing orders with the cost of holding inventory. The objective is to avoid repeatedly ordering too little or purchasing more stock than the business can efficiently store and sell.

These concepts become particularly important when a business handles hundreds or even thousands of products. Trying to keep track of everything manually can quickly become difficult, and even a small error in stock records can affect purchasing, sales, cash flow and financial reporting.

How Inventory Is Valued and Issued

Another important consideration is how businesses determine the cost of inventory sold or issued from their stores. Different inventory pricing methods can produce different cost figures and, consequently, affect reported profit.

One common method is First-In, First-Out (FIFO). Under FIFO, the goods purchased first are assumed to be sold or issued first. This method can be particularly intuitive for businesses dealing with products that can expire or become obsolete, such as food, pharmaceuticals and other perishable goods.

Last-In, First-Out (LIFO) assumes that the most recently purchased goods are issued or sold first. While it is a concept that is often discussed in inventory accounting, its use depends on the applicable accounting standards and reporting requirements. For businesses reporting under IFRS, LIFO is not permitted, making FIFO and other acceptable approaches more relevant.

The important point is that inventory management is not only about knowing how many units are available. Businesses also need to understand how those units are valued, when they should be replenished and how their movement affects the financial position of the business.

From Stock Records to Better Business Decisions

As a business grows, managing inventory through notebooks, spreadsheets or memory becomes increasingly difficult. More products mean more purchases, sales, suppliers, stock movements and records to monitor.

This is where technology can make a significant difference.

An Enterprise Resource Planning (ERP) solution can bring important business processes into one system, giving management better visibility over operations and making it easier to access and analyse information.

AiBiz provides businesses with tools that support inventory management, helping them keep track of stock levels, monitor inventory movements and make better-informed decisions. With clearer visibility over available stock, businesses can identify fast- and slow-moving products, reduce unnecessary purchases and better coordinate purchasing with sales and inventory levels.

Good inventory management is therefore not simply about having a well-organised warehouse or store. It is about protecting the business's money, reducing waste, preventing avoidable stockouts and ensuring that available resources are being used efficiently to generate revenue.

Because sometimes, the most important money in your business is not sitting in the bank. It may be sitting on your shelves.