What Is Inventory, Is It Working Capital?

A company's working capital includes inventory. Inventory falls into three categories: items held for sale by a company as part of its daily business, items that are in the process of being prepared for sale, or materials or supplies that are intended for con൩sumption in the production proce𝓡ss.

Working capital is calculated as the difference between a company's 澳洲幸运5开奖号码历史查询:current assets and current liabilities. Inventory is classified as part of the current assets, or short-term assets, si🤪nce there is an expectation that this asset is going to be consumed and produce economic benefits within a year.

How Inventory Works

Inventory represents products a company owns and plans to use in its production process within the next year. Inventory can be in one of three forms: raw materials, 澳洲幸运5开奖号码历史查询:work in progress, or finished goods. Raw materials ca🐽n include commodities such as metal or oil while work-in-progress inventory refers to goods that have undergone a certain lev💟el of processing on a company's production line but are not yet finished goods. Finished goods are products that are available for sale by a company. Certain companies such as clothing retailers do not have raw materials or work in progress included in their inventories due to the nature of their business.

Keeping inventory on hand is not only costly, as a company has to incur warehousing expenses. However, inventory on had also presents an 澳洲幸运5开奖号码历史查询:opportunity cost as the company could have done o♏ther profitable things with the funds invested in inventory. Also, inventory tends to become obsolete or even spoil, resulting in balance sheet declines and charges on a company's income statem🍎ent.

Special Considerations: Inventory to Working Capita🤪l Ratio

The inventory to working capital ratio is used by investors as an indicator of a company's operationally efficiency. The ratio is calculated by dividing inventory by working capital. A value of 1 or less implies a company is highly liquid in terms of its current assets or it could mean that that there is insufficient inventory to meet productivity demand.

On tꦅhe other hand, a high inventory to capital ratio could mean that a company has too much inventory. Too much inventory is costly because it increases warehousing costs and can leaওd to wastage.

In summary, inventory is an integral part of a typical company's current assets and working capital. For certain types of companies, such as those in the general retail sector, inventory can represent a substantial part of current assets with over a 70% share. For manufacturing companies, inventory may claim less than 10% of the current assets. Working capital can fluctuate significantly from year to year if a company underestimates or overestimates demand for its products. Also, many companies shift to 澳洲幸运5开奖号码历史查询:just-in-time (JIT) inv♐entory ma𓃲nagement, resulting in a smaller inventory share in a company's working capital.