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If your business deals in physical goods, chances are inventory is one of your biggest assets. It\u2019s what you sell and what you use to create products. But most of all? It\u2019s what helps you keep your customers happy.<\/p>\n
If you\u2019ve ever asked yourself questions like \u201cHow much inventory should I keep on hand?\u201d or \u201cWhy does inventory tie up so much of my cash?\u201d, you\u2019re not alone. The reality is that managing inventory \u2013 and doing so properly \u2013 can be the difference between maintaining a healthy cash flow and your customers looking elsewhere.<\/p>\n
Let\u2019s start with the basics. \u2018Inventory\u2019 is an umbrella term for the goods your business holds<\/a> to sell, produce, or operate. This includes everything from raw materials and components to finished products and even maintenance supplies (i.e. cleaning gear and office supplies).<\/p>\n Inventory might not be the flashiest part of running your small business, but it is one of the most important because it connects your supply chain to your sales strategy.<\/p>\n In financial accounting, inventory is listed as a \u2018current asset\u2019 on your company\u2019s balance sheet<\/a> because it\u2019s expected to be sold or used within the accounting period (~12 months). Proper inventory control is necessary here because it affects your business operations so much \u2013 think cash flow and storage costs, as well as your ability to fulfil customer orders on time.<\/p>\n Not all inventory is created equal. Businesses tend to divide inventory into a few main categories:<\/p>\n Some businesses also track anticipation stock (inventory bought ahead of seasonal spikes), decoupling inventory (extra WIP items that prevent production delays) and safety stock (buffer stock so that you won\u2019t run out during sudden surges in demand).<\/p>\n Your company\u2019s inventory has a huge influence on how much revenue you generate. Too little inventory can cause stockouts and\/or lost sales. Too much inventory will raise your storage costs and tie up cash. You will also run the risk of those goods becoming obsolete or damaged.<\/p>\n Poor inventory management can also result in excess inventory sitting idle, creating delays that negatively impact customer satisfaction. On the other hand, effective inventory management can keep your supply chain running smoothly and ensure your business can always fulfil orders.<\/p>\n Inventory has a part to play in both your income statement and your balance sheet. When goods are sold, their cost moves from inventory to cost of goods sold (COGS), which plays into your profitability. If that inventory sits around for too long, it becomes a drag on your financial health \u2013 especially if you\u2019ve overinvested in stock that won\u2019t sell quickly.<\/p>\n Keeping your inventory levels in check is also essential for strong cash flow<\/a>. If you\u2019ve spent a large portion of your capital stocking up on goods, you might struggle to cover your operating supplies and wages until that stock is converted into revenue.<\/p>\n Your inventory turnover ratio shows how many times you sell and replace your inventory over a set period. You can calculate it very easily by dividing your cost of goods sold by your average inventory value:<\/p>\n Inventory turnover = COGS \u00f7 Average inventory<\/em><\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2025\/07\/Inventory-Formula.png” alt=”Inventory Formula” title_text=”Inventory Formula” align=”center” _builder_version=”4.27.4″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_image][et_pb_text _builder_version=”4.27.4″ _module_preset=”default” global_colors_info=”{}”]<\/p>\n A low turnover ratio might suggest you\u2019re holding too much inventory or struggling to sell your products. A higher ratio often signals strong customer demand or good inventory management \u2013 but if it\u2019s too high, it could mean you\u2019re cutting it too close and risking stockouts.<\/p>\n Use this ratio alongside things like demand forecasting and historical data to find your ideal inventory levels.<\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2025\/07\/Inventory-management-best-practices.png” alt=”Inventory management best practices” title_text=”Inventory Management Best Practices” align=”center” _builder_version=”4.27.4″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_image][et_pb_text _builder_version=”4.27.4″ _module_preset=”default” global_colors_info=”{}”]<\/p>\n Smart inventory management doesn\u2019t need to be a headache. It just needs to be consistent. Here are a few practical tips to get things right:<\/p>\n Let\u2019s say you run a small skincare brand. Your raw materials inventory may include items such as essential oils, bottles, and packaging. As products are made, those materials move into WIP inventory \u2013 for example, creams may be filled but not labelled. Once labelled and boxed, they become finished goods inventory. You might also keep \u2018safety stock\u2019 of your bestsellers to handle unexpected surges in customer demand<\/a>.<\/p>\n Now imagine your products are stocked by a national retailer. Some of your finished goods might be sitting in distribution centres or even on consignment inventory terms \u2013 meaning they stay as your property until sold. Tracking all these moving parts is crucial for smoother business operations and cash planning.<\/p>\n [\/et_pb_text][et_pb_text admin_label=”Related terms” _builder_version=”4.27.4″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” locked=”off” global_colors_info=”{}”]<\/p>\n See related terms<\/strong><\/p>\n What are assets?<\/a> [\/et_pb_text][ba_social_share icon_bg=”#03002e” icon_padding=”10px|12px|10px|12px|true|true” layout=”classic” show_text=”off” btn_padding=”0px|0px|0px|0px|false|false” btn_bg_color=”RGBA(255,255,255,0)” _builder_version=”4.23″ _module_preset=”default” custom_margin=”50px||||false|false” custom_padding=”25px||||false|false” custom_css_before=” content: %22SHARE THIS%22;|| font-size: 16px;|| font-weight: 700;|| line-height: 22px;|| letter-spacing: 0em;|| text-align: center;|| color: #ff5447;|| margin-bottom: 10px;|| display: inline-flex;|| position: absolute;|| margin-top: 10px;” border_width_top_main=”1px” border_color_top_main=”#e4e4e4″ border_radii_icon=”on|5px|5px|5px|5px” global_colors_info=”{}” custom_css_before_last_edited=”off|desktop”][ba_social_share_child _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”facebook” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”linkedin” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”email” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][\/ba_social_share][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" If your business deals in physical goods, chances are inventory is one of your biggest assets. It\u2019s what you sell and what you use to create products. But most of all? It\u2019s what helps you keep your customers happy. If you\u2019ve ever asked yourself questions like \u201cHow much inventory should I keep on hand?\u201d or […]<\/p>\n","protected":false},"author":35,"featured_media":0,"menu_order":0,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"class_list":["post-295890","glo","type-glo","status-publish","format-standard","hentry"],"yoast_head":"\nTypes of inventory<\/h2>\n
\n
Why inventory matters<\/h2>\n
The impact of inventory on financial health<\/h2>\n
Inventory turnover: a key indicator<\/h2>\n
<\/h2>\n
Inventory management best practices<\/h2>\n
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Real-world inventory examples<\/h2>\n
What is operations management?<\/a>
What is an operating expense?<\/a><\/p>\n