Inventory is simply the total count and dollar value of all of your goods or products for sale.
You purchase your inventory from vendors and provide a markup on that cost to the retail value.
As you know, the difference between your cost and the sales price is your markup.
Your inventory constantly changes, it changes with the season, it changes by the week, it changes very day you sell products and every time you receive new products for sale.
Every business owner must know how much inventory they have in their business as it changes.
Well, its not important to know exactly what the count is on a daily or weekly basis, maybe knowing the total count on a monthly basis or every three months.
Sometimes, owners do not even know their inventory count till the end of the year or conduct an inventory once each summer during the slow season.
Let's talk about this inventory count.
We'll call it a physical inventory.
Every item for sale in the business is counted and a cost is assigned to each item based upon the cost when the item was purchased.
This physical inventory can be a simple process of counting everything in the warehouse, counting every thing on the sales floor.
Your records or purchase orders might indicate what the cost of the products are.
This becomes a record-keeping process and then the total can be added or extended out.
Obviously, the process becomes more complex when there are multiple facilities involved and when inventory can't be easily counted (too large or too many in different sizes).
This should be a process that is Incorporated into the business' monthly, quarterly, seasonal or annual workflow.
The physical inventory is the key to verifying your ultimate gross margin.
Estimating your margin from purchase orders and sales receipts is also done by every business, but knowing the exact number and being able to reconcile your gross margin at a specific point in time allows you to determine your 'true' profit.
We'll talk about this 'true' profit margin in another article.