Running and managing the different types of inventory costs of a business is a tricky ordeal that requires a lot of things. The requirements are monitoring, tracking, and organizing a company’s transactions, expenditures, and purchases. The most important metrics that companies need to focus on are monitoring the way of performing sales, inventory sales, advertising, or marketing and profitability.
This is important for those companies that are handling physical goods and inventory levels. Also, it is important for companies that are managing concepts like lead time, COGS, or shipping expenditures and make up a set of costs that companies need to be aware of.
Transforming Raw Material or Goods
The process of turning the raw materials or goods into a finished product has a lot of requirements. Moreover, time, energy, resources, and personnel help along the way. These elements, affect the financial statements such as balance sheet, income statement, or statement of cash flow.
The factoring and allocation of all these types of inventory costs themselves play a role in the financial success of the company. One last thing to focus on is the speed of the increase in costs and the speed at which products are selling.
Managing Inventory Levels
The inventory on hand is necessary and is required in order to fulfill the orders which have been made and the number of orders or demand for a product plays an important role when it comes to managing the level of inventory.
The company can have a sense of the level of inventory they need to have on a daily, weekly, and monthly basis although it is difficult to forecast the exact number of orders. They also need to be aware of the storage costs and opportunity costs related to keeping said inventory level, in order to find the optimum.
Another thing to keep in mind is the lead time or the time involved to obtain or produce new inventory. The association of lead times with a company is one of the barriers to the fulfillment of orders. This happens because there is not enough of a plant or a system that can produce. Thus, it takes time for the procedure of a new order, a new batch of a new shipment. This lead time has an important effect on costs and liquidity.
Shipping of Freight Costs
The shipment of a good comes with a financial component or a cost as well. There are different factors that partake in this role.
These factors are;
- the weight and dimensions of the product
- the speed of the transportation
- the shipment of the good
or even whether the buyer or the seller is paying for the shipping.
The machinery, equipment, and real estate a business needs are capital outlay. Although, that outlay appears to be significant in regard to the business and its allocation of costs. Each company needs to be aware of the fixed costs it needs to incur in order to continue its operations.
Employees and Payroll
On the flip side of human capital, is the payroll component. As it concerns the employees, there is the cost of hiring people, the onboarding process, and the cost of dismissal. Taking all these costs into consideration it is easier to maintain the financial wealth of the company.
Managing the finances behind a business that deals with physical products are an interesting and complex dynamic. The financial aspect of the business includes the prices of inventory, the types of sales, orders, and expenses that incur.
Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides that were created to help current and Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst.