Inventory Investment: Definition, Calculations, and All You Need To Know

inventory-investment
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Inventory investment is a term used by economists to explain shifting levels of stock that businesses hold from one year to the next, including work-in-progress and both tangible and intangible stock. 

Well, let’s tickle your brain a bit, have you ever wondered why inventory control specialists spend their time pouring over books and numbers? The answer is quite simple – inventory investment is the best shot you’ve got. It shows the relevance it has in every business that wants to remain on the block.

Statistics show that over 50% of the drop in investment spending of firms happens mainly because of a decrease in the concept of inventory investment.

Inventory investment helps businesses have the knowledge and keep track of their products and sales volume. Little wonder why most businesses apply care and caution in handling it.

If you are keen on having in-depth knowledge about inventory investment, then this article is just what you need.

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What is Inventory Investment?

Inventory investment is the difference between products and sales in a given year. It is simply production minus sales.

This concept is a part of the gross domestic product.

It is a fact that you may not exhaust the total amount of goods you produce in sales in a fiscal year. As a matter of fact, the goods sold within a year might be from the previous year. Inventory management is very important for business investors and economists in general.

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Types Of Inventory

The following are types of inventory:

  • Finished products: These are products that are ready to be sold immediately or to be stored in a warehouse. They will be in the warehouse pending when they will be shipped.
  • Raw materials: These are materials you can use in manufacturing your products.
  • Unfinished products: They are incomplete products that you can’t sell yet.
  • In-Transit products: Goods in this inventory are on their way to those that have placed a demand for them.
  • Cycle inventory: When these products arrive, we immediately sold them to customers after their supply.
  • Anticipation inventory: These are excess products firms keep when expecting an increase in sales.
  • Decoupling inventory: These are products, parts, and supplies firms reserve when expecting a delay or halt in production.
  • MRO good: This simply means maintenance, repair, and operating supplies” which support the production process.
  • Buffer inventory: It serves to protect the firm from an emergency.

What is an Unplanned Inventory Investment?

Unplanned inventory investment is the change in prediction or assumption. Actually, an investment can end up being bigger than originally intended if the growth is stronger.

However, by investing in inventory, businesses project into the future to make sales. They invest based on the hypothesis in areas like cost, as well as sales. A change in the hypothesis will cause a change in the business’ inventory investment.

On the other hand, if the sales are less than what you expect, then the company will invest less. Note that these predictions may change in days, weeks, and months.

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How to Calculate Unplanned Inventory Investment

You can calculate an unplanned inventory by simply deducting the inventory you require from the total amount of inventory you have. When you realize that the inventory investment is above zero, then your business has more than the inventory it requires.

This result proves that you have been investing cash you can use for something else, such as hiring or advertising.

However, the implication is that you can’t access this cash until an eventual increase in sales. You can also achieve this by putting a stop to purchasing the same inventory. In trying to correct this, it may take as long as days or months.

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Positive and Negative Unintended Inventory Investment

Positive and negative unintended inventory investment can happen when a firm’s patronage turns out to be different from their expectations.

For instance, a company can predict an increase in sales over a period of time and the reverse may be the case.

When customers buy fewer products than you expect, it results in an unexpected increase in inventory. This unintended increase is a positive unintended inventory investment.


On the other hand, when customers buy more than they expect, it results in a decrease in inventory. It is seen as a negative, unintended inventory investment.

What is Negative Unintended Inventory Investment?

Negative unintended inventory is a situation when your business doesn’t have inventory that can serve every customer’s needs. This is because your business has little or no products on display during business hours.

This can happen if the business experiences more sales than expected. Another reason may result from poor decisions by the management.

Conclusively, positive and negative inventory investment can adversely affect a business and result in poor sales that ordinarily shouldn’t take place.

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What are the Factors That Affect the Size of Investment in Inventories?

The following factors can affect the size of inventory investment:

Degree of safety stock

If your safety stock is high, then your size of inventory will be higher. Safety stock is the extra quantity of a product a company obtains and stores to prevent it from going out of stock.

This practice happens as a result of the uncertainty that revolves around the production and the sale of a product. Therefore, if the rate of turnover is high, the inventory investment will be less.

Carrying Costs

When the cost or expenses of keeping certain inventories is low, then the company can afford to keep larger inventories.

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Economy in Purchase

If the firm is likely to receive certain benefits in the form of cash discounts for purchases made currently, the size of investment in inventories is also likely to be larger because of the larger quantity of purchases.

Therefore, every business firm likes to maintain a sufficient stock of raw materials to ensure uninterrupted production.

Possibility Of Price Rise

Firms tend to procure precious minerals in larger quantities when prices will likely rise in the near future. This will help them save more in the face of new prices that may affect them greatly.

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Inventory investment over the business cycle

In the field of business, a sudden increase in consumption can arise from key players, such as consumers, the government, and exporters. When this happens, sales exceed the expectations of producers and in the process, their inventories become low.

This can be a result of the following:

  • Inventories may have accidentally increased
  • The demand of customers is increasing, which may lead producers to be out of stock

Producers or firms at this point need to build their inventories once again to a good level for positive inventory investment. The positive flow intended inventory investment has to go on until the firm attains the level of inventory they want.

There are times when firms are taken by surprise by the low demand and then fail to reduce their production quantity. This action leads to a rise in inventory. To remedy this, firms lower their inventory by reducing their production rate below the demand level of customers.

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Things to Consider in Managing Inventory Investment

You need to consider the following in managing inventory investment:

Don’t Accumulate Excess Inventory

As a business owner, accumulating too much inventory can be bad for the business. It can crumble a viable business. No matter how appealing it may seem, don’t overstock.

That period that seems favorable might take a turn for the worse. Hence, it is important for you to carefully and slowly stock up, as well as monitor the sales.

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Get Rid of Dead Inventory

A dead inventory is an inventory that hasn’t sold in a long while. A dead inventory messes with the turnover ratio of your inventory.

Rather than keep shelving dead inventory, organize a sale for it. If you cannot sell it, you can consider checking with your distributor for a refund.

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Look at Slow-Moving Inventory

Unlike the dead inventory, slow-moving inventory gradually becomes out of date. A slow-moving inventory can tie up your money in idle inventory and can negatively affect your cash flow and profits.


This type is usually hard to identify. However, you can identify them by looking out for firms just like yours in the same industry.

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Invest in Productive Inventory

This inventory is very vital. Therefore, take it seriously. It is important for you to keep tabs on your product inventory and ensure it stays that way.


To do this, apply the inventory turnover ratio in calculating the state of your product inventory. Effectively managing your inventory investment will prevent your business from crumbling at any minute.

FAQs

What is inventory investment?

The difference between product sales and inventory investment in a particular year is known as inventory investment. Simply put, it is sales minus production.

Why is inventory investment important?

Inventory investment is critical since it keeps firms from running out of products, losing money, and maybe losing consumers.

What are the determinants of inventory investment?

The following are determinants of inventory investment:

  • Degree of safety stock
  • Carrying Costs
  • Economy in Purchase
  • Possibility Of Price Rise

Why do we keep inventory?

The primary objective in terms of holding inventory is to ensure that customer service targets can always be met without compromising cash flow or running out of stock.

How can I calculate inventory investment?

You can calculate your inventory investment by simply subtracting the inventory you require from the entire quantity of inventory you have.

Conclusion

Inventory investment plays an important role in production and sales. Therefore, it is advisable for firms to pay notable attention to it, as it greatly influences production and sales.

We hope this article shed light on inventory investment and all you need to know about it. For comments and inquiries, reach us through the comment section or at makedailyprofit@gmail.com.

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