What is inventory? Inventory is the stock of goods a business holds to sell, plus the materials it holds to make those goods. For a gift shop, it’s everything on the shelves and in the back room. For a candle maker, it’s the finished candles and the wax, wicks and jars waiting to become candles. For a food truck, it’s the ingredients in the fridge and the cups and lids in the cupboard.
This guide covers the types of inventory, why inventory counts as an asset, simple ways to track it, and the handful of terms every small seller should know.
Inventory, defined simply
In accounting, inventory is goods held for sale in the normal course of business, goods in the process of being made for sale, and materials or supplies that will be used up in making them. In plain terms: anything you bought or made that you expect to turn into a sale.
Inventory is different from the equipment you use to run the business. Your espresso machine, market tent and card reader aren’t inventory, because you don’t plan to sell them. The coffee beans and milk are.
Types of inventory
Accountants usually split inventory into four types. Not every business has all four, but it helps to know which ones apply to you.
Raw materials
The ingredients or components you turn into products. For a soap maker: oils, lye, fragrance and wrapping. For a bakery stall: flour, butter, sugar. For a jewelry maker: beads, wire and clasps. If you only resell finished goods, you may not have any raw materials at all.
Work in progress
Items you’ve started making but haven’t finished. Candles curing for two weeks, pottery waiting for its second firing, a batch of hot sauce that still needs bottling. For most small makers this is a small slice, but it’s worth remembering when you count stock, so half-finished work doesn’t get missed or double counted.
Finished goods
Products ready to sell. For a boutique, a gift shop or a reseller, this is nearly all of your inventory. For a maker, it’s what you pack for market day.
Supplies (MRO)
MRO stands for maintenance, repair and operations: things you use up to run the business but don’t sell as products. Receipt paper, shopping bags, gift wrap, cleaning supplies, price labels. A food truck’s cups, lids and napkins often fall here too. You don’t usually count these to the last unit, but running out of bags on a busy Saturday is a real problem, so it’s worth keeping an eye on them.
| Type | Craft seller | Food truck | Boutique |
|---|---|---|---|
| Raw materials | Yarn, beads, wax | Meat, buns, produce | Usually none |
| Work in progress | Pieces being made | Prepped but uncooked food | Usually none |
| Finished goods | Ready-to-sell items | Bottled drinks, packaged snacks | All clothing and accessories |
| Supplies | Tags, bags, packaging | Cups, foil, napkins | Hangers, bags, tissue paper |
Why inventory is an asset
On a balance sheet, inventory is listed as an asset, usually a current asset because you expect to sell it within a year. That makes sense: it’s money you’ve spent that you expect to get back, with a profit, when it sells.
Inventory is normally valued at what it cost you, not what you’ll sell it for. If you bought 40 mugs at $6 each and sell them for $18, they’re $240 of inventory on your books, not $720. The profit only shows up when they sell.
Here’s the catch for small businesses: inventory is cash that’s sitting on a shelf. Every dollar tied up in slow-moving stock is a dollar you can’t spend on rent, restocking your best sellers or paying yourself. Stock can also lose value: fashion goes out of season, food spoils, packaging gets damaged. That’s why knowing how fast your stock sells, your inventory turnover ratio, matters as much as how much you have.
Key inventory terms
You don’t need an accounting degree to manage stock. These terms cover most of what you’ll run into.
- Stock on hand. How many units of an item you physically have right now. The most basic and most useful number.
- SKU. A code that identifies each distinct product or variant. See what a SKU is.
- Reorder point. The stock level that tells you it’s time to order or make more. A simple way to set it: how many you sell per day, times how many days it takes to restock, plus a little extra. If you sell 3 jars of honey a day and restocking takes 5 days, reorder when you get to about 15, plus your safety stock.
- Safety stock. A buffer you keep in case sales spike or a delivery runs late. A few extra units of your best sellers before a holiday weekend is safety stock.
- Shrinkage. Inventory you’ve lost without a sale: theft, damage, spoilage, miscounts or items given away and not recorded. You find it when your count is lower than your records say it should be.
- Cost of goods sold (COGS). What the items you sold cost you. Sales minus COGS is your gross profit.
- Dead stock. Items that haven’t sold in a long time and probably won’t without a markdown.
- Stock count (physical count). Counting what’s actually on your shelves and comparing it to your records.
- FIFO. First in, first out: selling or using your oldest stock first. See FIFO inventory.
Simple ways to track inventory
Small sellers usually start with paper or a spreadsheet and move to an app as they grow. Each works; the question is how much time it costs you.
Pen and paper
Fine for a stall with a handful of products. Count what you bring to market, count what you bring home, and the difference is what sold. It breaks down when you have many items, variants or more than one person selling.
Spreadsheet
A spreadsheet with columns for SKU, product name, cost, price and stock on hand is a big step up. It’s free and flexible. The weakness is that it doesn’t know when you’ve made a sale. Someone has to update it, and when a busy day gets in the way, the numbers drift.
Inventory or POS app
When your point of sale system tracks inventory, stock drops automatically with every sale. You get low-stock warnings, a record of every change and reports without extra typing. It costs money, but it saves the hours you’d spend keeping a spreadsheet current.
| Spreadsheet | Inventory or POS app | |
|---|---|---|
| Cost | Free | Subscription |
| Updates after a sale | By hand | Automatic |
| Low-stock warnings | Only if you build them | Built in |
| History of changes | Hard to keep | Recorded with each change |
| Best for | Few products, one seller | Many products, variants, staff or locations |
Good inventory habits for small sellers
- Record stock the day it arrives. Add received goods right away, not at the end of the month.
- Record damage and giveaways. A cracked mug or a sample handed out still leaves your stock. Log it with a reason so your counts stay honest and you can see where shrinkage comes from.
- Count regularly, one section at a time. Counting one category a week is easier than a full count once a year, and catches problems sooner.
- Label everything. Barcodes make counts and checkout faster. You can use the free barcode generator or read about barcodes for products.
- Watch your slow sellers. If something hasn’t sold in months, mark it down or bundle it before it becomes dead stock.
Tracking inventory with SleepingFire
SleepingFire keeps stock counts that drop with every sale, flags items that are low or out of stock, and records every change as an adjustment with a reason: received, damaged, returned or a correction. Size and color variants each have their own count, stock count sheets by category turn differences into adjustments, and the inventory valuation report shows what your stock is worth at cost and at retail. Learn more about inventory management.