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What You Need to Know about Asset and Inventory
For small business owners, the difference between
inventory management and
asset management may be nebulous, if not outright confusing. Inventory and assets occupy similar places in a company’s books, as both are involved in the creation of income. To compound the issue further, inventory is sometimes referred to as an asset (essentially, some inventory items are assets, but not all assets are inventory). It would be understandable to think that a company could invest in one kind of software or system for managing both.
In fact, while there are similarities in the technology and means used to manage these major investments, there are important differences between the two that, if left undiscovered, can doom a business. Poor accounting and operational inefficiencies are
two major reasons why small businesses fail, and not knowing the difference between assets and inventory qualifies as both.
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What are assets and what is inventory?
Assets, in this case referring to
fixed assets, are long-term pieces of property, usually longer than one reporting period, that are used in the production of income. Examples of assets include buildings, computer equipment, machinery and vehicles, and they are not purchased with the intent of being sold quickly. Eventually, assets go through periodic depreciation (so as to write off their worth over their useful lives for tax purposes), impairment write-downs and finally disposal.
Inventory, on the other hand, is the raw materials, work-in-progress goods and finished products that the business considers ready for sale. Inventory is also known as “current assets,” since the company only expects to have this inventory for a short time. Turnover of inventory is what creates income; keeping it on the shelves and in the warehouses for too long means liquid cash is tied up and the profit will be postponed or won’t ever be realized.
How are asset and inventory management similar?
In both instances, a management system is put in place to protect and monitor what is often the largest investment on the company’s balance sheet. While
46% of small businesses either don’t track inventory or use a manual process for tracking, companies are increasingly moving towards integrating automated tracking systems that utilize barcode or RFID technology into their workflow to protect against needless loss.
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By using barcodes on both
inventory and
assets, companies are able to control employee theft (the source of as much as
43% of retail inventory shrinkage) and other forms of shrinkage including accidental loss, which creates ghost assets and demand shortfalls. Eliminating administrative error for calculating and tracking inventory and assets means less investment on unneeded inventory, and fewer tax costs paid on assets that aren’t actually present to help you create income. Using correct processes in tracking cuts auditing time, streamlines operations and provides the opportunity for better decisions to be applied.
How are asset and inventory management different?
The responsibilities of asset and inventory management systems differ greatly, though the goal of improving the bottom line is of equal value.
An
asset management system must go beyond tracking the current location of your fixed assets. Quality systems record an asset’s depreciation and can calculate the asset’s current worth relative to its original cost by
using various methods, such as standard straight line depreciation and accelerated formulas like declining balance depreciation and the sum of the years digits depreciation. (This calculation is necessary for assets, yet is not used with inventory formulas because assets are often used over the course of many years, and their declining worth must be written off for both internal record keeping and tax forms.)
Other necessary tasks and features for asset management systems include:
- Tracking the need for periodic preventative maintenance to keep things running smoothly and to extend the useful lives of your investments.
- A check-in/check-out system for shared assets such as laptops, vehicles and other equipment to monitor which employees currently or most recently had an asset in their possession.
- An alert system that reminds you if checked-out items are overdue, when warranties have expired and certification/calibration needs.
- Syncing your asset database via mobile and cloud-computing, in order to move from a slow manual auditing process (which can be riddled with errors and rendered out-of-date by the time the audit is completed) to a fast, accurate, automated protocol that ensures compliance.
An
inventory tracking system has a different role due to the transitory nature of your inventory. While having lots of inventory to sell is normally seen as a good thing, there is a delicate balance that businesses must strike between holding onto too much product to be efficient and not having enough inventory to meet demand. The
costs of carrying inventory, including service costs, risk costs (also known as the threat of employee or outsider theft or breakage), space costs and more, can shrink your profits and sink your business, even if your product is selling well.
This is why a good
inventory turnover ratio is so important, and is a major reason why so many businesses turn to inventory management software. The inventory formula is cost of goods sold divided by average inventory. There are two ways an out-of-whack ratio can hurt your business:
- If your cost of goods is low but your average inventory is high, your LOW inventory turnover ratio means you have spent too much on holding inventory that you can otherwise create quickly and cheaply. In an effort to always meet customer demand, you have built up a warehouse of goods that will deteriorate and become obsolete over time. If you need to write-down or slash the cost of your inventory in order to sell it, you’ve short-changed your business.
- If your cost of goods is high but your average inventory is low, your HIGH inventory turnover ratio can also doom you, you won’t have enough stock to meet the demand you’ve cultivated, and you’ll either find yourself dealing with unhappy customers who must wait to receive your product (and they’ll be less likely to return, which means you’ll spend 6-7 times the amount of money to attract a new customer) or you will not have enough business to survive past the first few years, a common end to many small businesses.
The end goal for inventory management is to create and maintain a
lean inventory. This refers to a company’s ability to effectively manage inventory so they have just enough on hand to satisfy demand without overloading the business on holding costs. To accomplish this goal, businesses need a system that can identify patterns in demand (so as to ramp up production when demand normally surges, for example during holiday season) and create supply chain visibility, in order to understand what aspects of the chain are the most time-consuming and where inefficiencies can be eliminated (or the efficiencies can be maximized).
Asset and inventory management are as different as the assets and the inventory themselves. The fixed and semi-permanent nature of assets requires a system that extends their useful lives and is more about streamlining the back-end of operations; the short-term nature of inventory makes it important to have software that helps you weigh consumer demand and is more imperative for maintaining front-end satisfaction. Both asset management and inventory management pose unique challenges, yet they each provide opportunities for increased efficiency and decreased waste, so they must both be tracked and controlled using independent, automated systems.
How would implementing stock and asset control software make your business more efficient?
