Inventory management within Asset Management Software is often a light, but effective, requirement. Whilst the terms ‘Inventory’ and ‘Asset’ are, in many situations, interchangeable, small and medium businesses tend to have different workflows for managing them.
Systems that have deeper financial capabilities – typically called fixed asset management – tend to have deeper inventory management features.
Taking an asset management view of inventories, businesses that have multiple quantities of an asset tend to require inventory capabilities in an asset management tool.
Inventory vs. Asset
The term inventory is used to describe a material that a business intends to sell, rent, or consume. Businesses may hold an inventory of finished goods and products ready to be distributed. Companies that manufacture goods may hold inventory of raw and packaging materials as well as work in progress (WIP).
Maintenance repair and operations (MRO) inventory includes all materials needed for MRO purposes, such as spare parts. While these items are not being incorporated into finished products, they can be considered inventory.
On the other hand, an asset often refers to something a business owns and uses, such as computers and office equipment. Intellectual property, like a patent, is also considered part of the business’s asset portfolio.
There are different types of assets:
- Fixed assets are intended for long-term use
- Current assets are expected to be exchanged for cash within a year
- Operating assets are assets needed for business operations
One important financial statement companies produce is a balance sheet, which includes a list of assets as well as liabilities and equity. Balance sheets are often drafted on a monthly, quarterly, or yearly basis. In financial terms, assets are described with the formula:
Assets = Liabilities + Shareholders’ Equity
While inventories and assets differ, there is also some overlap, as a result, an asset can be an inventory and an inventory can be an asset. In accounting, inventory is often considered part of the organisation’s assets as long as it is expected that the inventory will be converted into cash within a year.
Asset inventory refers to how businesses manage the stock of their assets through organisation and tracking. For instance, a business may need to count and document all of its laptops or maintenance equipment.
How to Manage Inventory With an Asset Management System
Dedicated applications like Asset Management Software are used to track assets throughout the entirety of their life cycle, from procurement to disposal. Software solutions can help a business document the location and details of its assets.
Some businesses may only need to track inventory and assets in a simple spreadsheet. Often, the larger and more complex a business is the more essential having an asset management system becomes.
Investing in Asset Management Software helps to prevent inventory loss, provide more in-depth asset analysis, and increase efficiency.
Effective inventory management improves productivity and encompasses actions like buying, storing, and tracking. Demand can be monitored and data can be readily available to create forecasted demand.
Stock-level management improves the visibility of stocking for procurement purposes as well as for sales. Items can be categorised and, depending on the software, it may be able to generate sales and purchase orders.
Clear inventory levels help reduce over-purchasing and let business leaders know if they are stocking too much of a finished item. Conversely, accurate inventory levels let the company know when it is time to replenish inventory. Inaccurate inventory can result in shorting of customers and wasted time looking for missing inventory.
Inventory Cycle Times
Inventory cycle times can be measured differently based on the type of goods or services a company provides. Cycle times may refer to how long it takes for a company to manufacture and sell an item. However, for retailers and distributors, inventory cycle times often centre around finished goods. Cycle times will represent the amount of time needed for inventory turnover.
Optimising inventory cycle times can help keep customers satisfied. These cycle times can be tracked with Asset Management Software and making customers wait for items to come back in stock can lead to missing out on sales. While having too much inventory can reduce the available cash flow and increase storage costs. Excess inventory may lead to obsolescence or expiration depending on the type of product.
Inventory turnover is the rate that inventory is sold or used in a designated period. The ratio measures how efficiently a company manages its inventory. A ratio of 5 over a year means that a company sells through its entire inventory 5 times in one year.
The benchmark inventory ratio is the target ratio for an organisation. It may vary greatly between industries. A balanced inventory turnover ratio for a company’s industry correlates to reduced storage and holding costs. When an inventory turnover ratio is too high it can signify incomplete orders and trying to expedite replenishment orders to avoid stock out. While lower ratios may indicate low sales, holding too much inventory, or inefficient inventory management.
The formula for inventory turnover ratio is:
Inventory Turnover Ratio = Cost of Goods Sold (COGS)Average Value of Inventory
The cost of goods sold is the amount in dollars related to making a product while the average value of inventory takes fluctuating costs into account and is the mean value of inventory in the specified period.
Monitoring inventory turnover can tell a company how well it is generating sales from items in its inventory. This key performance indicator can provide insight into what finished goods are in high demand and which products’ marketability should be improved.
The Importance of Optimising Inventory
When inventory is optimised, working capital can be reduced as inventory buffers can be lessened. Having the right amount of inventory allows organisations to meet demand without shortages. Collaboration can increase as clear inventory levels help the business assess its financial health. Inventory and accounting are closely related. When both are integrated, business leaders can review important metrics with accuracy and confidence.
Typically, inventory management is part of an enterprise resource planning (ERP) system and contributes to optimised inventory levels. Organisations use ERP systems to automate and manage business activities such as accounting, procurement, project management, and supply chain operations. Asset Management Software organises and tracks inventory levels along with purchase orders and sales.
This software enables optimal inventory levels and allows a company to record the location of inventory. Companies are enabled to track inventory between separate locations or while in transport. Warehouse processes such as picking, packing, and shipping can benefit from this software. Some solutions allow for the simple scanning of items into the system by integrated RFID tags and scanners.
As with most software-buying decisions, what system you choose to integrate depends on your requirements. In general, if your primary requirement is to track and maintain assets and have light inventory management requirements, then an asset management system should address your requirements.