Inventory Average: Understanding, Mathematical Formula, Illustration
Freshened Up: Grabbing the Sharp End of Inventory Management
Crack the code on what's truly keeping your goods store in check - average inventory! Let's cut to the chase and find out all you need to know about this essential inventory management tool.
Getting Down to Brass Tacks: What Is Average Inventory?
Average inventory is a magical calculator that gives you the value or count of a specific good or bundle of goods for multiple periods. It's not always the same as the median value for the same bag of data. To get the average, simply average the opening and closing inventory numbers over a specific timeframe.
The Skinny on Average Inventory
Here's what you can expect from average inventory:
- Empower your overall sales volume comparison game with average inventory figures.
- Tracking down inventory losses is child's play with these numbers in your pocket.
- Moving average inventory lets you follow your goods from the last purchase made, smoothing your inventory game.
- Good inventory management is the key to defeating your business rivals and boosting your profits.
Pulling Back the Curtains: Inventory 101
Inventory is the simultaneous value of all the goods ready for sale or raw materials for creating those goods, kept by a company. Cracking the code on successful inventory management can put you at the top of the retail hierarchy.
Since two points rarely tell the whole story when it comes to inventory changes over time, average inventory is often used to give a more accurate snapshot of activities. For example, if a business wants to average out its inventory for the fiscal year, it might use the count at the end of each month, including the base month. Add up all the inventory values and divide by the number of points (in this case, 13) to get the average inventory.
Lights, Camera, Action: Putting Average Inventory to Work
Armed with average inventory figures, you can compare your overall sales volume, spot inventory losses, and track perishable goods that may have expired. The average inventory formula is simple:
Average Inventory = (Current Inventory + Previous Inventory) / Number of Periods
Out with the Old, in with the New: Moving Average Inventory
When it's possible to keep a constant inventory tracking system, businesses may opt for a moving average inventory. With this method, values are adjusted based on info from the last purchase, making comparisons between periods easier.
Case in Point: The Savvy Shoe Company
Our hero shoe company is on a mission to manage its inventory better. Right now, the warehouse is filled with $10,000 worth of kicks. This is on par with the inventory from the previous three months, worth $9,000, $8,500, and $12,000.
To calculate a three-month inventory average, the shoe company takes its current inventory of $10,000, adds it to the previous three months' inventory (totaling $9,000 + $8,500 + $12,000), and divides by the number of data points (4). Boom! They now have an average inventory of $9,875 over the period in question.
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Sources
- AICPA, "Inventory Credit Management," Linked Reports, https://www.aicpa.org/interestareas/ fs/assuranceadvisoryservices/assuranceadvisoryservices/assuranceservices/content/linkedreports/auditingaccountingguides/inventory_credit_management.pdf
- Investopedia, "Average Inventory," Investopedia, https://www.investopedia.com/terms/a/ average_inventory.asp
- Investopedia, "Inventory Turnover," Investopedia, https://www.investopedia.com/terms/i/inventory_turnover.asp
- All Business, "Direct Cost versus Indirect Cost," Small Business - Chron, https://smallbusiness.chron.com/direct-cost-versus-indirect-cost-14819.html
- Business Dictionary, "Deferred Cost of Goods Sold," Business Dictionary, https://www.businessdictionary.com/definition/deferred-cost-of-goods-sold.html
In the dynamic business environment, understanding average inventory is crucial for effective financial management; it offers insights for comparison of overall sales volume, tracking inventory losses, and monitoring the lifespan of perishable goods. The defi industry, with its focus on increasing efficiency and transparency in finance, can leverage these inventory metrics to strengthen its position in the business landscape.
Armed with average inventory data, businesses can seamlessly integrate it into the broader scope of the defi industry, given that many defi protocols rely on smart contracts for inventory management and finance purposes. This combination could enhance overall industry efficiency by streamlining operations and promoting greater transparency.
