The Beginners Guide to

Inventory Management
Brought to you by Cin7

What is inventory?
Inventory is a broad term that encompasses
every physical thing that a business owns - from
the desks and computers in the office to the
stock in the warehouse or store front.
In most cases, when people refer to inventory, they
often mean all the products a business keeps in
stock in order to sell. This type of inventory is crucial
to the operations of most businesses. Turning
inventory into revenue by selling it at a profit is the
key reason for their existence.
A good business will spend a substantial amount of
time analysing its inventory: too little inventory and
a business cant make enough sales; too much and
the cost of ownership and storage can be overwhelming.

What is inventory management?

When we refer to inventory management we mean the theories, processes and techniques involved
in controlling and valuing inventory.
The basic function of inventory management is to make sure that you have the right amount of stock on
hand, at all times, at the right cost. Why is this important? Having good inventory management is critical to
a businesss cash flow and bottom line.
Inventory managers need to carefully balance the need to have enough inventory to sell to meet market
demand in a timely fashion with the dangers of storing too much stock. Storing inventory costs money (for
instance in rent) and ties up cash that could be used elsewhere in the business.
The availability of accurate stock figures and a good estimation of the value of this stock are critical factors
to good inventory management.

Basic Types of Inventory

For retailers, warehouse distributors and wholesalers its important to understand the types of
inventory used in the supply chain. Below are four primary inventory types you should know, plus
other inventory types that are important to business.

RAW MATERIALS

FINISHED GOODS

This is inventory that can be made into

Inventory that is ready for people

products. These are usually unprocessed

(consumers) to purchase.

with the intention they will be made into

finished products.

MRO (MAINTENANCE, REPAIR AND OVERHAUL)

Inventory that is not part of the production

WORK IN PROGRESS (WIP)

line, but contributes toward the finished

This is inventory that is in the process of

good such as consumables or computers.

being made into a product.

Other Type of Inventory

TRANSIT INVENTORY

ANTICIPATED INVENTORY

BUFFER INVENTORY

This is inventory that is in the

This is inventory that is kept

This is extra inventory that is

process of being delivered

in excess of current demand.

stored for uncertainties in

from one place to another.

This inventory is kept in

demand and supply. Having

anticipation that it will be

too much safety or buffer

needed in the future, when

inventory may mean

times are busy i.e. Christmas

increased costs for storage or

holding this stock.

The importance of
the Inventory Value Calculation
Although its important to know how much inventory you own, it is equally important to know how
much that stock is worth.
Typically, businesses will record the cost to purchase their stock, plus any additional costs such as
freight and manufacturing costs. The sum of the costs to acquire your inventory make up what we
call your inventory value.
There are two traditional ways you can go about tracking how much your inventory value is at any one
time. You can either use a perpetual inventory system or a periodic inventory system.
A perpetual inventory system continuously updates your inventory records when stock is added or
subtracted. This will include when goods are purchased or sold, but also if stock is manufactured, lost,
broken or expired. In a perpetual inventory system such as Cin7, you would usually keep a ledger of stock
and all your corresponding stock values. This ledger monitors stock that goes in and out of your inventory
and provides a real time valuation of stock.
On the other hand a periodic inventory system only updates your inventory on a periodic basis. Inventory
determinations for this usually take place on a monthly or quarterly basis or in some cases at the end of
each financial year.
Calculating your inventory value is a crucial factor in making business decisions, such as working out if
you can afford to purchase more stock. It is also a legal requirement for accounting, so it will form an
element of your end of year financial reports.

Important Inventory Methods

FIRST-IN FIRST-OUT (FIFO)

LAST-IN FIRST-OUT (LIFO)

This means the oldest inventory

This means the newest inventory

brought into stock is the first to be

brought into stock is the first to be sold.

sold. From an accounts perspective it

From an accounts perspective it means

means the following when it comes to

the following when it comes to

calculating cost of goods:

calculating cost of goods using the

I.e. if you sell 100 t-shirts and I bring the

same example above:

first 80 in at a cost of $10 and the next 80

If you sell 100 t-shirts and I bring the first

at $15, then the cost of goods would be:

80 in at a cost of $10 and the next 80 at

$15, then the cost of goods would be:

First 80 at $10 = $800

Remaining 20 at $15 = $300

First 80 at $15 = $1200

Remaining 20 at $10 = $200

Meaning a $300 difference in cost of goods in this example between FIFO and LIFO.
FIFO and LIFO are quite different. FIFIO is better suited towards industries that have a steady price and
usually sell its oldest products first. LIFO works well in industries where prices fluctuate and the newest
units are sold first. FIFO is Cin7s preferred method of managing inventory.
In some regions, LIFO is restricted from being used as a method for calculating cost of goods. FIFO is the
more popular and recommended method of calculating your stock value.

AVERAGE COST
This means that all inventory is calculated by an average unit cost for goods that are
available for sale, during a specific period of time. Its sometime called the Weighted
Average Method.
The average cost method is usually used is the accounting system chosen cant handle FIFO or
LIFO or if its hard to assign a specific cost to an individual inventory item.

Setting up an Inventory Management System

If your business is growing but you dont have stock visibility, or youre running out of stock, then
you probably have an inventory related issue. Having an Inventory Management System allows you
to manage all your stock from a central place and will help you make better business decisions.
Businesses that experience growth, but dont have sufficient Inventory Management processes in place
often suffer from:
Inefficient operations
Theft
Low Customer Satisfaction
Lost data
A disjointed customer experience
Misguided business decisions caused by a lack of data
Stock issues (Oversupply or Undersupply caused by incorrect forecasting)

Things to consider before selecting

an Inventory Management system
Understand your sale and supply workflow. Work at where you need stock visibility and understand
what processes currently communicate to each other, and who is involved. Put aside time to work on
your inventory management system. Despite what people say, its not going to work overnight. You
need to have resource that can work on the system, as with any system implementation
Get all your product data together. Vendors should be able to supply guidance on how to import your
data and best practices. Its important you understand where all your stock and cost data is, and you
have easy access to this
Get cost information on all your products. At some stage, youre going to need to input costs into your
chosen system. Start preparing early, by getting all your costing information together
Training: Having the right people and training in place is one of the most important things to consider.
You can have the greatest inventory system in the world, but if you dont have good processes and
training systems to support it, the system wont yield the results you want. This is particularly
important for organisations operating both and inventory system and point of sale, because not all
point-of-sale staff are as trained as managers
Make sure youre performing scheduled stock takes and have a set process around this

An Inventory Management System

should allow you to:
1

Track important business metrics

Increase your ability to save floor space

Help you better understand your

Save you time and money that is spent

customers and your ability to convert

finding stock, resolving issues or

sales

handling logistic administration

Analyse your stock, how quickly it gets

sold and how long it sits there costing

Most importantly, it should help you

make better business decisions

you money

How do you know if youve chosen

the right inventory management system?
You should be able to:
Manage your costs and have clear

Improve your balance sheet by

and accurate visibility over these.

effectively managing supply issues

Manage your business on the go

Understand your margins and

and give you access to critical

accurately calculate your landed

business data

costs

Have the ability to manage things

Integrate and communicate across

like multi-currency, multiple

your other important business

locations, consignment of stock

systems.

and all the logistical processes

needed to better serve your
customers and fulfil orders.

Why opt for cloud inventory management?

Cloud inventory management offers unique advantages that traditional
ERPs and locally installed solutions struggle with. With a cloud inventory
management system youre better equipped.

Gain Real-Time Visibility

Get Mobile

Having real time data helps support better

Because cloud inventory management systems

business decisions. Cloud inventory gives you

are usually designed for mobile and tablet, it

the ability to see exactly how much stock you

means you have the ability to run your

have at a given time. This helps businesses

business on the go. It also gives you the ability

become more operationally efficient and

to take the checkout to the customer. With a

reduces the amount of time spent trying to find

good Inventory Management and POS system,

stock. It also allows businesses to take orders,

youre free to create a mobile checkout, which

transact or process stock all on the go.

is great for pop up stores, adding registers or

performing stock quotes on the go.

Get Integrated

Keep your data safe

Disruptions in mobile technology and the

Because all information is stored in a central,

internet has meant integrating software is now

secure location, cloud systems have changed

seen as competitive advantage. It improves

the way consumers and businesses operate.

operational efficiently and enables process

Being able to access and export data from a

automation. Being able to leave the integration

cloud inventory system, thats backed up

up to the experts means more time the

regularly means less chance of losing critical

business has to spend on the things that

business data.

matter, rather than trying to make systems

work.

General steps to take when

setting up an Inventory Management System:
1
2

Learn the system till you get comfortable enough to perform basic tasks.

Try to customise your system to your requirements. These include things like
customising documents, logos, branding and any integrations. If youre integrating into
cloud accounting and finance software, then you should have an accounting specialist,
to advise you on the best setup for your business.

Import all your contacts and utilise any vendor templates provided.

Create all your products manually or import all your products.

Configure your invoices

Test the system and identify any bugs or areas where more learning is required.

Test the system again

Give all your staff access to the system and ensure they are effectively trained.

Have a dry run with a few products and staff to ensure everything is working as

10

Perform an entire stock take before going live

11

intended.

Go live start using the system and iron out any things you need to improve on.

Important inventory metrics

you should be tracking
Stock on Hand
and Availability

Being able to see what stock you have based on the

current stock on hand, incoming stock and open sales
to be dispatched is essential to understand what you
will need to purchase. It also gives you insight into
what stock you have on hand and will need to have.

Current Inventory
Valuation

The current inventory valuation looks at your total

value of stock on hand, based on the landed cost
value inventory that is received. Your inventory value
is important to because it ensures accurate financial
statements. A good inventory management system
should sync with your chosen accounting package to
update any COGS (cost of goods sold) figures.

Stock
Aging

Being able to see how long inventory has been in

stock, without being fully sold is important to keeping
inventory carrying costs down, because slow moving
stock simply means too much working capital is being
held carrying stock. It also means theres not enough
available for other areas of the business.

Sales
Forecasting

Calculating the average monthly sales of a

product gives a projection of how much stock
will be available over time, based on stock on
hand, incoming stock, open sales and
forecasted sales. Sales forecasting gives
businesses an idea when they are likely to run
out of stock and when to reorder stock.

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