Inventory and stock are the two terms that are often used interchangeably in the business but are they the same?
No. They are not the same.
Understanding the difference between “Inventory” and “Stock” is crucial for businesses that want to optimize their operations and maximize their profits. In this article, we will explain the key differences between inventory and stock and why it matters for your business.
What is Inventory?
Inventory refers to the raw materials, work in progress, and finished goods that a business has in stock. It includes all the items that a business uses to produce its products or services. For example, a bakery’s inventory would include flour, sugar, butter, eggs, and other ingredients, as well as finished baked goods such as bread, cakes, and pastries.
For manufacturing motives, Inventory includes
- All the raw products of bakery items such as sugar, flour, and eggs.
- Pieces of bread and baked biscuits before packaging.
- Finished products like cakes, biscuits, and bread.
- Materials and instruments required for maintenance of machines used for baking.
Inventory is accounted by three basic methods including First In, First out (FIFO) which assumes that the products that are produced first are sold first, Last In, First Out (FIFO) which assumes that the latest products purchased are sold first and weighed average method.
Inventory management
Inventory management is the process of controlling and tracking a company’s inventory levels to ensure that the right products are available at the right time. This involves monitoring inventory levels, forecasting demand, ordering new supplies when needed, and avoiding overstocking or stockouts.
What is stock?
Stock refers specifically to the finished items and goods that a business has in hand to sell to the customer. It doesn’t include the raw material or the products which are in progress. For example, a bakery store’s stock would include all the finished products that are present in the store to sell to the customer.
Stock includes
- Finished products such as bread, cakes, etc.
- Raw material (if the company sells it directly) like eggs.
Stock management
Stock management is the process of monitoring and tracking a company’s stock levels to ensure that it has enough products to meet customer demand. This involves tracking sales trends, forecasting future demand, and ordering new stock when needed. It is important to avoid overstocking, which ties up capital and storage space, as well as stockouts, which can result in lost sales and unhappy customers.
Key differences between inventory and stock
Inventory | Stock |
It refers to the stock along with its raw material. | Stock is a part of the inventory. |
It includes · Raw material · Work in progress · Finished products · Maintenance instruments | It includes · Finished products · Raw material (if the company directly sells it) |
It is replenished and maintained after a couple of months. | Replenishment and maintenance are required on daily basis (sometimes twice a day). |
The best scheme is to have sufficient inventory. | The best scheme is to have no or minimal stock |
It helps to estimate the sale price of the stock. | It helps to calculate the business revenue. |
It is purchased by the value of inventory using a method such as LIFO, FIFO, and weighed average method. | It is sold at the current rate of products in the market. |
Why does the Difference Matters?
The key differences between inventory and stock are now completely distinguished from each other but why it is so important for a businessman to have a thorough insight into it? Here are the reasons:
Management purposes
Understanding this distinction is important because it affects the way that businesses manage their resources and make decisions about their operations.
For example, a company that produces goods needs to manage its inventory levels carefully to avoid overstocking or understocking. If it overstocks, it risks tying up too much capital and storage space, and if it understocks, it risks running out of supplies and not being able to fulfill customer orders.
On the other hand, a company that sells goods needs to manage its stock levels carefully to ensure that it has enough products to meet customer demand without overstocking. If it overstocks, it risks tying up capital and storage space, and if it understocks, it risks losing sales and customers.
Business revenue
Another reason why the difference between inventory and stock matters is that it affects a company’s financial statements. Inventory is considered an asset on a company’s balance sheet, while stock is considered an expense on its income statement. This means that managing inventory levels can have a direct impact on a company’s profitability and cash flow.