In this article, we explore what inventory on hand is and why its important. We also share our process for calculating on-hand inventory. Read on to learn more.
What is Inventory On Hand?
Inventory On Hand refers to the total quantity of goods and/or products that a business has in its possession at any given time. This could include items stored in a warehouse, on store shelves, or even in transit, as long as the business owns them. It is essentially a snapshot of what a company has in stock.
Example: At the close of July, Beachside Apparel, a clothing retailer, checked its Inventory On Hand and found it had 500 swimsuits in its warehouse, 200 displayed in its storefront, and another 100 en route from the manufacturer. In total, Beachside Apparel owned 800 swimsuits which gives a clear snapshot of its current stock at that specific moment.
Why On Hand Inventory Is Important
Inventory On Hand is impprtant for several reasons. Some of these include:
Optimized Stock Levels:
Knowing the Inventory On Hand helps businesses maintain optimal stock levels. Overstocking leads to increased holding costs and the risk of obsolescence, while understocking can result in missed sales opportunities and dissatisfied customers.
Inventory is an asset on a company's balance sheet. Accurate Inventory On Hand figures contribute to correct financial statements, which are crucial for investors, stakeholders, and internal decision-making.
Better Cash Flow Management:
By understanding and controlling Inventory On Hand, businesses can make informed purchasing decisions, optimizing their cash flow. Money that isn't tied up in excess stock can be invested elsewhere.
Regularly tracking Inventory On Hand can offer insights into sales trends, helping businesses predict future demand and adjust their purchasing strategies accordingly.
Regularly assessing Inventory On Hand against sales records can highlight discrepancies, which could be a result of theft, damage, or other issues.
5 Steps to Calculate Inventory On Hand
Use our 5-step Inventory On Hand process to effectively manage your inventory. Simply follow the steps below:
Formula: Inventory On Hand = Initial Stock + Acquisitions – Transactions – Reversions + Modifications
1. Initial Stock:
This represents the quantity of inventory available at the onset of a specific interval (e.g., the start of a quarter or year).
Example: At the beginning of the year, Sunrise Textiles counted their inventory of fabrics and found they had 10,000 meters of fabric in stock. This would be their initial stock.
Incorporate the inventory items acquired during the specified period.
Example: During the first quarter, Green Apple Electronics received shipments of 500 new iPhones. This would be their acquisitions for the specified period.
Deduct the items that were successfully traded or sold during the interval.
Example: Throughout the month of June, Bella's Boutique sold 150 dresses from their shop. This amount would be deducted as transactions from their inventory.
Factor in items reintroduced due to customer returns or those reverted back to vendors.
Example: In July, AutoGear Motors had 10 cars returned by customers due to defects and 5 cars reverted back to the supplier because of delayed payments. This total of 15 cars would be their reversions for that period.
Make allowances for items that might have been misplaced, misappropriated, compromised, or rediscovered (e.g., following an inventory audit).
Example: After an annual audit, Golden Books Store found that 50 books were damaged by water and could not be sold, but also discovered 20 classic novels that were misplaced and are now available for sale. The net modification for their inventory would be a reduction of 30 books.
NexaElectro Solutions is a large electronics retailer gearing up for the holiday season. Recognizing the importance of Inventory On Hand, they've decided to utilize the outlined process. Here’s how they employed our process:
1. Initial Stock:
At the onset of Q4, NexaElectro Solutions reported having 8,000 units of their popular product, the "NexaNode". This amount is considered their 'Initial Stock'.
Anticipating a surge in holiday shoppers and wanting to maintain adequate stock, NexaElectro secured an additional 12,000 units of the NexaNode during the quarter. These 'Acquisitions' bolstered their inventory.
NexaElectro experienced robust sales due to their effective marketing campaigns, resulting in the sale of 13,000 NexaNode units. These sales are accounted for under 'Transactions', reducing their inventory by that amount.
The holiday shopping frenzy is also synonymous with returns. By the end of the quarter, 500 units of the NexaNode were returned by customers for various reasons. These 'Reversions' were added back to their inventory.
During their year-end inventory audit, NexaElectro discovered that 50 units were damaged during transportation, and 100 units, previously thought to be lost, were found in an unopened shipment. These numbers were adjusted under 'Modifications'.
Initial Stock = 8,000 units
Acquisitions = 12,000 units
Transactions (sales) = 13,000 units
Reversions (returns) = 500 units
Modifications = +100 units (found) - 50 units (damaged) = 50 units
Using the formula: Inventory On Hand = Initial Stock + Acquisitions – Transactions + Reversions + Modifications
Let's plug in the numbers:
Inventory On Hand = 8,000 + 12,000 - 13,000 + 500 + 50
Inventory On Hand = 20,000 - 13,000 + 550
Inventory On Hand = 7,000 + 550
Inventory On Hand = 7,550 units
So, by the end of Q4, NexaElectro Solutions will have 7,550 units of NexaNode in their inventory.
By applying the process, NexaElectro Solutions can accurately determine their Inventory On Hand to ensure they're well-prepared for the next business quarter and can make informed operational and financial decisions.
We hope our article has now left you with a better understanding of what inventory on hand is and its significance in making informed business decisions.