Inventory in Commercial Establishments: A Comprehensive Guide for Non-Accountants

Inventory is one of the vital elements in any commercial establishment, as it represents the goods and goods owned by the establishment for the purpose of sale or use in production processes. Inventory management requires a thorough understanding of its components, valuation methods, and its impact on the financial performance of the organization. In this article, we will review in a simplified and comprehensive way everything related to inventory in commercial establishments, directing our conversation to non-accounting specialists.

What is inventory?
Inventory is the group of goods and materials held by an enterprise for the purpose of sale or use in production. Inventory includes:

1. Raw materials: The raw materials that are used in the manufacturing process.
2. Semi-finished materials: goods whose manufacture is not yet complete.
3. Finished products: finished goods ready for sale.
4. Goods purchased for resale: Finished goods purchased for resale without modification.

Inventory components
Inventory in commercial establishments consists of the following elements:

1. Goods in the facility's warehouses: whether they are in the main or subsidiary warehouses.
2. Goods owned by the establishment and held by its agents: those who sell the goods for a commission.
3. Goods in transit: Goods purchased by the establishment and have not yet arrived at the warehouses.
4. Goods owned by the enterprise and located in the warehouses of creditors: as a precursor as security for a debt or loan.

Items excluded from inventory
Some items are excluded from inventory when valuable, including:

1. Goods sold and not yet received by their owners: are not legally owned by the enterprise.
2. Trust goods: which arrive at the establishment as commission agents and are not owned by it.
3. Goods that have not yet been examined and received: although they are in stock.
4. Goods held by the enterprise as a mortgage for a debt or loan: provided by the enterprise to others.

The importance of inventory
valuation Inventory valuation is of great importance in the financial and accounting operations of the organization, as it helps in:

1. Follow-up costs: determine the cost of purchasing the goods and their expenses.
2. Customs clearance procedures: Knowing the costs associated with the imported goods.
3. Preparation of financial statements: such as income statement and statement of financial position.
4. Cargo shipment control: from suppliers to warehouses.
5. Determining the financial condition of the entity: through profits, losses and expenses.

Inventory counting methods
Two main inventory counting methods are used:

1. Cycle counting: The inventory value is updated at the end of a specific time period, such as the end of a month or year.
2. Continuous Inventory: The inventory value is updated instantaneously with each sale or purchase.

In addition, a snap inventory can be performed  to verify the accuracy of records and detect any tampering or theft.

Inventory Valuation Principles
Establishments rely on certain principles for inventory valuation, including:

1. Cost basis: Valuation of inventory at purchase price plus associated costs such as customs duties and transportation expenses.
2. Cost or market basis, whichever is lower: Valuation of inventory below cost or market price, applying the principle of prudence.

Inventory valuation methods

There are several ways to evaluate inventory, including:

1. FIFO method: Assume that the first goods purchased are the first goods sold.
2. Last Inbound First Out (LIFO) method: Assume that the last goods purchased are the first goods sold.
3. Weighted Average (WAC) method: Calculates the average cost of all goods in stock and applies it to available goods.
4. Specific identification method: Used when the cost of each unit can be determined separately, such as cars or jewelry.

Impact of inventory valuation on earnings
Inventory valuation affects the declared earnings of an enterprise. For example, using the  FIFO  method in an inflation environment results in higher profits compared to using LIFO. Therefore, the appropriate inventory valuation method must be chosen for the nature of the business and the economic environment. 

Improve inventory management To
improve inventory management in commercial establishments, the following steps can be followed:

1. Use of electronic inventory management systems: These systems help in tracking inventory accurately, and updating records in real time, which reduces errors and increases efficiency.
2. Determine safe stock levels: Set a minimum inventory to ensure that orders are met without shortages or surpluses, helping to reduce costs and improve customer satisfaction.
3. Optimize warehousing and organization: Organize warehouses to ensure easy access to products, and use technologies such as FIFO (First In, First Arrived) or LIFO  (First In, Last Pay) to improve inventory flow.

4. Good planning and identification of needs: Analyze historical data to predict future demand and determine the appropriate quantities of inventory, reducing waste and increasing efficiency.
5. Training and staff development: Providing training programs for employees on the best practices of warehouse management and the use of modern technology, which enhances work efficiency and reduces errors.
6. Continuous monitoring and evaluation: Conduct periodic inventory audits to ensure the accuracy of records and identify any discrepancies, and regularly evaluate warehouse management performance to identify areas for improvement.
7. Use modern technology: such as barcode and RFID systems to facilitate the process of tracking and instant updating of inventory, which reduces errors and increases efficiency.
8. Collaborate with suppliers: Improve inventory planning by collaborating with suppliers and exchanging information about demand and forecasts, helping to adjust inventory levels and save materials in a timely manner.
9. Warehouse analysis: Understand patterns and optimize processes by analyzing inventory data, which helps in making better decisions and improving overall efficiency.
10.  Adopt automated and robotic systems: to improve accuracy and reduce errors, and take advantage of advanced software to analyze data and forecast demand to avoid shortages or gluts in stock.

By following these steps, businesses can improve inventory management, resulting in reduced costs, increased efficiency, and improved customer satisfaction.