Inventory
Inventory refers to the goods, materials, supplies, or products a business keeps on hand for sale or for use in operations. In Filipino MSME terms: ito yung “stocks” — mga panindang binebenta, ingredients na ginagamit, o materials na kailangan sa araw‑araw na operasyon.
Inventory is one of the most important assets of a business because it directly affects sales, cash flow, and profitability.
- Term: Inventory
- Category: Operations, Accounting, Retail, Supply Chain
- Core idea: Goods and materials a business holds for sale or use
- Best for: Retailers, sari-sari stores, carinderias, manufacturers, service businesses
- Key use: Track stock levels, prevent loss, and manage cash flow
Why Inventory Matters
For Filipino MSMEs, inventory is critical because it:
- Determines sales capacity — no stock means no revenue
- Affects cash flow — too much stock ties up capital
- Prevents spoilage and waste through proper rotation
- Supports accurate pricing and costing
- Helps identify fast-moving and slow-moving items
Good inventory management is a survival skill for small businesses.
Types of Inventory
1. Finished Goods
- Products ready for sale
- Examples: canned goods, snacks, cooked meals
2. Raw Materials
- Ingredients or components used to produce goods
- Examples: meat, spices, packaging, flour
3. Work-in-Process (WIP)
- Partially completed items
- Examples: marinated meat, dough resting, items being assembled
4. Supplies
- Non-sale items needed for operations
- Examples: LPG, cleaning materials, printer ink
Inventory in Accounting
Inventory appears as a current asset on the balance sheet.
It is used to compute Cost of Goods Sold (COGS):
COGS = Beginning Inventory + Purchases − Ending Inventory
Accurate inventory counts ensure correct profit calculations.
Inventory Management Methods
1. FIFO (First-In, First-Out)
- Oldest stock is sold or used first
- Best for food, perishables, and sari-sari stores
2. FEFO (First-Expired, First-Out)
- Items closest to expiry are used or sold first
- Ideal for groceries, pharmacies, and food businesses
3. LIFO (Last-In, First-Out)
- Newest stock is used first
- Rarely used in the Philippines due to accounting rules
4. Manual Logbook / Notebook Method
- Simple tracking for sari-sari stores and microbusinesses
- Daily record of stock-in and stock-out
5. POS or Inventory Software
- Automated tracking for growing MSMEs
Common Inventory Problems
- Overstocking — ties up capital and increases spoilage risk
- Understocking — leads to lost sales
- Shrinkage — due to theft, damage, or miscounts
- Expired goods — poor rotation practices
- Unrecorded purchases — leads to inaccurate COGS
Regular audits and proper documentation prevent these issues.
Best Practices for MSMEs
- Track SRP changes (especially for sari-sari stores)
- Use FIFO or FEFO for perishables
- Audit inventory weekly or monthly
- Record all purchases immediately
- Monitor fast-moving vs. slow-moving items
- Set par levels (minimum stock levels)
Example / Context
Example 1 (Sari-Sari Store):
Tracks daily stock of soft drinks, noodles, and canned goods using a notebook.
Example 2 (Carinderia):
Uses FEFO to ensure ingredients closest to expiry are used first.
Example 3 (Retail Shop):
Monitors fast-moving items to avoid stockouts during peak days.
Example 4 (Manufacturer):
Tracks raw materials and WIP to compute accurate COGS.
Related Terms
FAQs
1. How often should inventory be counted?
MSMEs should count inventory weekly or monthly, depending on volume and spoilage risk.
2. What is the best inventory method for small stores?
FIFO or FEFO is best for food and retail; notebook or POS systems help track stock accurately.
3. Is inventory considered an expense?
No. Inventory is an asset. It becomes an expense only when sold (COGS).
4. How does inventory affect profit?
Incorrect inventory counts lead to wrong COGS and inaccurate profit reporting.