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Understanding the different types of inventory

Understanding and classifying your inventory can help you plan and budget to achieve your business goals.

There are three main types of inventory:

  • Raw materials inventory – Raw materials inventory are raw materials that your business changes to produce its goods and/or services. For example, if you manage an ice cream business, raw materials inventory could include milk you use to make ice cream.
  • Work-in-process inventory – Work-in-process inventory is any unfinished goods that your business has made. If your business makes and sells chairs, work-in-process inventory would include any unfinished chairs on hand that your business has made.
  • Finished goods inventory – Finished goods inventory includes any finished goods that are ready to sell. If you have a retail business that buys and sells toys, the toys you buy would be finished goods inventory.

If your business has a lot more work-in-process inventory than finished goods inventory, it might not be finishing goods quickly enough to fill orders. If your raw materials inventory is a lot less than your work-in-process inventory, you might be running out of raw materials.

Consumables and supplies expense

Consumables are items that you purchase to help you run your business on a day to day basis. They fall under supplies expense as incidental items that are expected to be consumed within one year. Consumables includes factory supplies for maintenance such as machine oils and rags, or office supplies such as light bulbs, stationery or ink cartridges.

Examples of different types of inventory

Different types of businesses have different types of inventory.

Manufacturing businesses

If you have a manufacturing business, you buy inventory to change it into another good that you sell to your customers. Your customers may be consumers and other businesses.

Examples of inventory that a manufacturing business may have include:

  • raw materials, such as wood, to make a shelf
  • work-in-process inventory, such as an unfinished cake in a food manufacturing business
  • finished goods inventory, such as a bed you’ve finished making.

Retailers and distributors

Retailers and distributors don’t usually have raw materials inventory and unfinished goods inventory. If you’re a retailer or distributor, most inventory you have is finished goods inventory, such as:

  • toys that you sell to customers
  • cans of soft drink that you sell to other businesses as a retailer if you’re a distributor.

Service businesses

Like other businesses, service businesses have inventory. For service businesses, inventory is any supplies you use up to provide your services. Check out these examples:

  • If you’re an acupuncturist, inventory may include needles you use to provide acupuncture.
  • If you have a gardening business, your inventory may include herbicides you use to remove weeds.
  • If your business is a hairdressing business, your inventory may include dyes you use to change people’s hair colour.

This content was first published on business.gov.au

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