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Inventory planning is the method and procedures companies use to determine the amount of products they should have on hand for meeting consumer demand. This planning may involve several steps, depending on the company’s inventory management system and business operations. Inventory is often the second largest expense companies can have outside of payroll, making inventory management and planning an important business function.
The first step of inventory planning is to estimate future sales. This estimation analysis can be conducted by reviewing historical sales records to ascertain various sales trends for company products. Businesses often add a buffer amount to their sales estimates. This buffer amount can ensure that companies do not run out of various products if higher sales occur than previously estimated. Companies may also conduct an economic market analysis to assess consumer demand, behavior, and income. These economic factors can lead to higher consumer purchases and result in lower overall on-hand available inventory.
The next step in inventory planning is to purchase the necessary products for business locations. This process includes selecting the products, displays, receiving or verification methods, and reorder system. Many companies attempt to order consumer goods that coincide with holidays or seasons. Companies can also order popular products that will sell quickly and generate higher revenues. This inventory planning process often includes an accounting budget. This budget ensures that companies do not overspend on products that will result in sluggish sales and higher warehousing or other business costs.
Companies may also make plans for moving inventory quickly before new items must be purchased for upcoming seasons. These methods include promotional sales, markdowns, and clearance or liquidation sales. These processes ensure that companies do not get stuck with old inventory that becomes unsellable. Unsellable inventory is commonly called obsolescence in the business environment. Obsolete inventory may require companies to write off the products as a loss against operational income. Depending on the amount of inventory on-hand, this loss can represent significant reductions to the company’s income.
An important consideration in inventory planning is keeping track of all physical products in the company’s inventory. Companies use one of two accounting methods: perpetual or periodic. A perpetual inventory system maintains an accurate count after every purchase or sale of products. The periodic inventory system only updates inventory numbers at specific time periods during the accounting year. Most companies choose to update inventory on a monthly or quarterly basis, depending on their business operations.