“Quick Look: What You’ll Learn”
- Understand the three main types of merchandise inventory: raw materials, work-in-progress, and finished goods.
- Learn how to manage perishable, non-perishable, and seasonal inventory effectively.
- Discover how to calculate and improve inventory turnover.
- Follow best practices like accurate forecasting, audits, and real-time tracking.
- See how accurate merchandise tracking improves cost savings, profitability, and customer satisfaction.
- Includes formulas, examples, and actionable strategies for retailers and manufacturers.
Our previous blog post provided information on the basics of merchandise inventory, including its definition, importance, and typical organisational challenges. Now, let's get down to the nitty-gritty of handling this key asset. We'll break down the different types of merchandise inventory, explain how to value it, and give you some simple tips to improve inventory turnover. Whether you're trying to improve your merchandise accounting, reduce risks like shrinkage or running out of stock, or just want a better supply chain, understanding these things is super important for making smart choices.
This blog post should give you some helpful information to really change how you handle inventory. Ready to make your financial reports more accurate, lower your cost of goods, and grow steadily? Let's get started.
Types of Merchandise Inventory
Raw Materials, Work-in-Progress, and Finished Goods
Merchandise inventory forms the backbone of physical goods businesses throughout their journey from production to final sale. These segments demonstrate the primary types of Merchandise Inventory:
Raw Materials: Manufacturing companies maintain substantial raw material quantities within their merchandise inventory because they create products. Manufacturing processes require basic components that represent the foundational materials used. The materials used in furniture production, such as wood, nails and paint, are classified as raw materials by manufacturers, but bakeries list flour, sugar and eggs as their fundamental raw materials.
Work-in-Progress (WIP): This is all the stuff that's halfway through being made. Say, a car that's partly put together or a dress that's been cut out but not sewn up. Keeping tabs on WIP is key to seeing how well your production line is doing. Plus, it can mess with your accounting because of the cost of labour and materials that are still tied up in these items.
Finished Goods: The final goods have reached a saleable state. Retailers deal with a wide range of finished products, including clothing and electronics. Efficient finished goods inventory management ensures businesses maintain the right stock levels to fulfil customer demand and avoid excessive inventory that increases storage costs and decreases inventory turnover rates.
Perishable vs Non-perishable Goods
Effective merchandise inventory management relies on understanding whether goods are perishable, which affects how they should be handled.
Perishable Goods: These products have brief shelf lives & need special storage conditions to prolong their usability. Fresh produce, alongside dairy products and baked goods, serve as examples of perishable goods. Inventory management for perishable goods requires meticulous valuation methods to address spoilage and waste, as these factors affect business profitability. Retailers have to maintain high inventory turnover rates to reduce losses from expired products.
Non-perishable Goods: These products maintain their usability for extended periods because they experience less spoilage. Non-perishable goods consist of canned foods, dry goods, and various household items. Merchandising for non-perishable goods requires consideration of product obsolescence and market trends, even though these items do not demand immediate sales like perishable goods.
Seasonal Merchandise
Seasonal inventory means products with demand that changes according to seasonal trends and holiday events.
Holiday Inventory: Christmas decorations, alongside Halloween costumes and Easter eggs, serve as primary examples of seasonal merchandise. To succeed in commercial peak seasons, retailers need to establish their merchandise accounting and inventory valuation plans ahead of time so they can maintain sufficient stock levels to satisfy consumer demand without creating surplus stock that requires markdowns after the season ends.
Summer or Winter Apparel: Items such as swimsuits and shorts or winter coats operate within specific seasons of the year. Accurate demand forecasting when managing these goods is essential to prevent overstocking or stockouts, directly impacting inventory turnover rates and profitability margins.
Event Inventory: Merchandise associated with specific occasions, such as sports events, music concerts and cultural festivals, is included within this classification. Retail merchandising inventory should match event schedules to ensure products are available when needed and inventory turns efficiently during high-demand events.
Businesses that understand different merchandise inventory types can adjust inventory valuation methods accordingly while optimising inventory turnover and refining merchandise accounting practices to address their products' unique needs, which helps them stay competitive and profitable in the market.
Merchandise Inventory Turnover
What is Inventory Turnover?
The inventory turnover evaluates how often a company sells & replenishes its inventory within a specific timeframe – usually one year. A substantial inventory turnover ratio suggests effective sales operations and inventory control, yet a minimal turnover ratio warns of excess inventory or reduced market demand.
This measure is connected to merchandise accounting because inventory turnover affects cash flow, as well as storage costs and profit margins. A store with an inventory turnover ratio of 8 sells all of its stock eight times over the course of a year. This clearly shows how well their availability is working and how well their supply and demand are matching up.
Key factors influencing turnover include:
- Demand forecasting accuracy
- Supply chain efficiency
- Pricing and promotional strategies
Companies need to align inventory turnover with valuation techniques such as FIFO or LIFO to produce accurate financial statements which show real profitability.
How to Calculate Merchandise Inventory Turnover
To figure out Merchandise Inventory Turnover, use this formula:
Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory
To help you understand, here are the steps:
- Find the COGS: Extract this figure from your merchandise accounting records—it represents the direct costs of producing sold goods.
- Calculate Average Inventory: Add opening and closing inventory values for the period, then divide by two.
- Divide COGS by Average Inventory: The result reveals how many times inventory was replenished.
Example: If COGS is $500,000 and average inventory is $100,000, your turnover ratio is 5. This implies inventory was cycled five times annually.
Best Practices for Effective Merchandise Inventory Management
Regular Inventory Audits
The foundation of accurate inventory valuation and reliable merchandise accounting rests on routine audits. The auditing process can use either cycle counting for high-value items or complete physical audits to perform stock evaluations.
- Through inventory audits, businesses can detect discrepancies between stock records and physical counts to reduce inventory shrinkage.
- Assess stock control systems for effectiveness while maintaining compliance with financial reporting standards.
- Identifying storage and handling inefficiencies leads to reduced cost of goods sold (COGS).
- Audits protect businesses using FIFO or LIFO valuation methods from regulatory pitfalls by ensuring compliance and consistency.
Accurate Forecasting and Demand Planning
Predictive accuracy remains essential for managing inventory turnover while preventing stockout situations. Leverage these tactics:
- Historical Data Analysis: Procurement processes benefit from analysing consumer behaviour patterns and seasonal shifts.
- Collaborative Planning: Coordinate with suppliers and sales teams to predict demand surges that enhance supply chain performance.
- Safety Stock Calculations: High-demand items require buffer inventory but avoid excessive storage costs.
Merchandise inventory liquidity and profitability benefit from improved forecasting precision, which advanced tools like predictive analytics and AI-driven platforms deliver.
Implementing Real-Time Inventory Tracking
The age of immediate data access renders traditional manual tracking methods outdated. RFID tags combined with IoT sensors and cloud-based inventory management software provide:
- Live Stock Visibility: Maintaining inventory levels at warehouses or retail outlets helps prevent stock shortages and reduces surplus stock.
- Automated Reordering: Connecting to suppliers ensures automatic purchase order initiation when inventory reaches critical levels to enhance inventory turnover rates.
- Integration with Merchandise Accounting Systems: Ensure seamless inventory valuation and reporting by syncing real-time data with financial platforms.
Pro tip: Link real-time tracking to just-in-time (JIT) inventory systems to reduce holding costs while improving operational agility.
The implementation of these operational best practices for merchandise inventory allows companies to refine their merchandise accounting processes while simultaneously protecting their business from unpredictable market swings and enabling inventory to drive ongoing business growth.
Key Takeaways on Merchandise Inventory
Proper inventory management of merchandise enables alignment between stock levels and customer demand, which affects inventory turnover rates and operational productivity. It helps businesses maintain financial flexibility by avoiding unnecessary stock accumulation while decreasing waste and improving profitability through precise inventory tracking.
How Accurate Merchandise Inventory Can Benefit Your Business
Accurate merchandise inventory records lead to:
- Increased Cash Flow: Free up capital for investment.
- Better Customer Satisfaction: Ensure product availability.
- Enhanced Decision-Making: Use reliable data for strategic choices.
- Reduced Operating Costs: Minimise emergency orders and storage costs.
- Tax and Compliance: Simplify financial reporting.
Ready to transform your merchandise inventory management? The unified supply chain and logistics platform from Omniful delivers complete end-to-end solutions that enable real-time tracking along with demand forecasting capabilities and automated reordering functions. Our tools simplify inventory evaluation processes and enhance turnover rates to optimise operations while increasing profits.
Take the next step: Book a demo today to learn how Omniful can secure your inventory strategy for the future.
FAQs
Is merchandise inventory classified as a Current or Non-Current Asset?
Merchandise inventory receives a clear classification as a current asset. This asset classification is appropriate because it covers products planned for sale in the upcoming 12-month period which meet short-term liquidity standards.
How does inventory turnover impact business performance?
When a business achieves a high inventory turnover ratio, it demonstrates effective sales performance and efficient stock management, increasing cash flow. When inventory turnover rates drop, low levels indicate possible excess inventory or insufficient demand that restricts available capital.
How do you calculate merchandise inventory?
Calculate merchandise inventory with the following:
Merchandise Inventory = (Beginning Inventory + Purchased Inventory) - COGS
