Why is inventory important for a business? How is inventory different from other assets of the business?

All businesses are in business to make a profit. A company has two choices; it can sell a service or sell a product. Inventory is important for a business because inventory is the item that product companies sell to make a profit. Without having any inventory to sell, a product based company cannot make a profit. Whether a company buys inventory “just in time” to make it and sell it or the company has inventory on hand, the inventory items must be bought and then re-sold at a higher price. Inventory is different from other assets of the business. Companies do not intend to add value to their “other assets” and re-sell them. In the book Financial Accounting Tools for Business Decision Making Kimmel explains, “A company’s gross profit (rate) may be expressed as a percentage by dividing the amount of gross profit by net sales” (Kimmel, 2011). The cost of inventory is the expense used to calculate the gross profit. By matching the correct inventory expense to the revenue earned, a company can determine the gross profit. However, all assets of a company should assist to generate revenue for the business; inventory is sold to generate that revenue. I find the financial services industry fascinating. Obviously financial service companies earn service based revenue. Like product based companies you have to manage the cost of capital. Cash in the company acts like inventory in a merchandising company.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.