What is inventory? Types and examples

Inventory is one of a business’s most important assets. At its most basic, inventory is anything a business buys to resell to customers. This can mean different things for different businesses, and there are several types of inventory that can be used in different scenarios.

This article takes a deeper dive into the definition of inventory, types and examples of inventory, and why understanding inventory is crucial for your business.

What is inventory?

Inventory, also called ‘stock’, is goods and materials your business buys to resell to customers. This includes both finished goods (products) and raw materials (components to make finished goods). Inventory can also refer to a list of all the items a business has on hand to produce or sell products.

Like business equipment, vehicles and property, inventory is a type of business asset that can have a significant impact on your finances. 

Ideally, you want to keep enough inventory on hand to meet customer demand. At the same time, it’s important to avoid holding too much inventory, which can lead to high storage costs and negatively impact your cash flow. 

That’s why tracking metrics like your inventory turnover is important for finding the right balance.

Types of inventory & examples

Let’s look at some of the main types of business inventory:

Raw materials

Raw materials include all the items that are used to make a final product. For example, in a cupcake-making business, raw materials would include items like butter, sugar, flour, food colouring and anything else used to make the finished cupcakes.

Raw materials can either be bought from a supplier or be a byproduct of a manufacturing process. In the cupcake example, the raw materials would be sourced from a supplier rather than manufactured by the business. 

However, if we consider the flour business, that company would buy wheat from farmers to make its final product. In that case, wheat and anything else used to make flour would be treated as raw material inventory.

This type of inventory only applies to businesses that manufacture products. For a business that buys and sells finished products, there is no manufacturing involved and no raw materials.

Work in progress

Work in progress refers to any inventory that is in the production stage but isn’t ready for sale yet. In a cupcake-making business, this could include cupcakes that have been baked but not frosted yet, and stored in the freezer for future use.

Like raw materials, work in progress inventory only applies to businesses that manufacture products.

Finished goods

Finished goods are items that are ready to be sold. For a cupcake-making business, this would be the baked and iced cupcakes on display for sale. For a business that buys products from a supplier, finished goods are all items that have been quality-checked and are available for sale.

Raw materials, work in progress and finished goods are the three main types of inventory that are factored into a business’s financial accounts.

That said, there are some other specific types of inventory that a business can use in certain situations:

• Maintenance Repairing and Operating (MRO) inventory: MRO inventory includes any items used to maintain or repair production machines and equipment. Examples of MRO inventory include lubricants, coolants, nuts, bolts and screws.
• Buffer inventory: Also known as ‘safety stock’, buffer inventory includes items stored in a warehouse to account for things like unexpected spikes in customer demand, delays in transport or supply shortages.
• Cycle inventory: Cycle inventory refers to items that are ordered in batches and on a regular basis. This usually includes materials that are directly used in the production process. Using the cupcake business example, cycle inventory could include bags of flour and sugar (which are also raw materials inventory).
• Transit inventory: Transit inventory includes items being moved from one location to another, such as raw materials being transported to the factory or finished goods being transported to the store.
• Service inventory: For a service-based business, this type of inventory refers to how much service a business can provide in a given period. For example, a massage therapist with 5 booking slots a day has a service inventory of 35 bookings in a given week.
• Excess inventory: Also known as ‘surplus stock’, excess inventory is any unsold or unused goods or raw materials that a business doesn’t expect to use or sell, but must pay to store or dispose of.

What does inventory mean for a business?

Inventory can be a big expense for a business, and a big profit earner, so it’s essential to keep track of the numbers.

Holding too little inventory can mean not being able to meet customer demand, delays in production and lost sales.

Keeping too much inventory can lead to a cash flow shortfall, excessive storage costs and spoilage of perishable stock.

Inventory management helps you figure out how much inventory you have, its value and how much you need to run your business efficiently. 

With QuickBooks inventory management, you always know what’s selling and what you need to order. On top of that, your balance sheet is automatically adjusted as your stock values change, so your financials are always up to date.

Find out more about QuickBooks inventory management software and start a free trial today.