Inventory vs Stock: What Is the Difference?

October 29, 2024

When we speak of business (mostly retail, and manufacturing) in the corporate world, "inventory" and "stock" often go hand in hand. However, there are key differences between the two that every entrepreneur should know. Both pertain to the product a company holds, but are used for different purposes and can influence the business processes, budgets and even customer care.

In this article, we’ll walk you through the distinction between inventory and stock, what they are, and how they can benefit your business.

Defining Inventory and Stock

First, let’s review the meaning of each term:

• Inventory includes everything a business stores in order to make, sell or enable products or services. These include final products that are for sale, raw materials for manufacture, and spare parts or other supplies used in running the business on a daily basis.

• Stock, in contrast, is what a company holds for sale to customers. It refers to finished products that are either available for immediate sale or being sold at present.

What is the Difference Between Inventory and Stock?

Although inventory and stock refer to something a company owns, there are a few key differences:

Scope of Definition

• Inventory refers to a wider range of goods — raw materials, WIP (work in progress) items, finished products, maintenance supplies, etc. It encapsulates everything necessary to develop and maintain the services that a company sells.

• Stock is a smaller definition, meaning anything you are selling directly to the consumer. It doesn’t include production or service products.

Business Functions Involved

• Inventory influences many business functions, from purchasing to manufacturing and warehousing. For example, a manufacturer’s warehouse would include raw materials, production equipment, and parts for servicing machines.

• Inventory is directly associated with sales and retail activities. It only contains finished goods that the company wants to sell to other companies or to customers directly.

Industry Relevance

• Inventory plays an integral role in manufacturing, retail, and distribution businesses because these companies control not only finished products, but raw materials, components, and supplies.

• Stock is primarily utilized in retail and sales environments. For instance, the inventory of a clothing store is the clothes they have on sale.

Impact on Financial Statements

• Inventory is typically placed as an asset on a company’s balance sheet, and includes raw materials, WIP, and finished goods. And it’s also one of the biggest variables in figuring the COGS.

• Stock too is an asset but represents only the finished goods that can be sold. In a retail company, stock and inventory could fall together; for a manufacturer, stock would be only part of the stock.

Role in Supply Chain Management

• Inventory control involves controlling all the resources needed to manufacture or maintain the goods. This can include buying raw materials, quality control, and lead times.

• Stock management, on the other hand, is ensuring that the right product is in stock so that customer demand can be met and not overstocked.

Why the Distinction Matters

It is useful to distinguish inventory from stock for a variety of reasons:

• Efficient Resource Management
  When businesses know what is considered inventory versus stock, they can allocate resources efficiently, having what they need to produce and not having more stock that may hang up the cash.

• Better Financial Planning
  Choosing the correct stock/inventory designation impacts the accounting, budgeting, and reporting aspects of the business, which are all important to your balance sheet.

• Customer Satisfaction
  Keeping the stock levels right is essential for satisfying customer needs. Insufficient stock can cause storage problems and carrying costs, excessive stock may cause stockouts and loss of sales.

• Optimized Supply Chain
  Incorporating inventory and stock classification can simplify the supply chain by allowing companies to anticipate demand, set production dates and handle suppliers better.

Types of Inventory

To understand inventory management, consider the four primary inventory types typically encountered in a business:

1. Raw Materials
   These are the raw materials that are essential to manufacturing. A furniture maker, for instance, would see wood and nails as raw materials.

2. Work-in-Progress (WIP)
   It can even apply to products that are still in production. WIP inventory: These are the goods in production but not completed.

3. Finished Goods
   These are ready-made items that can be sold or shipped. For a manufacturer, it would be the finished good waiting to be distributed to retailers or end users.

4. Inventory (MRO) Maintenance, Repair, and Operations (MRO)
   MRO is what you’d require to keep the business up and running, such as repairs on equipment or cleaning products.

Types of Stock

When we talk about stock, we mean:

1. Retail Stock
   They are products that retailers own in order to sell to their customers. It could be on the sales floor, or in the back room for quick replenishment.

2. Buffer Stock
   Safety stock is the extra supply that a company keeps on hand for any fluctuations in demand or supply chain delays.

3. Cycle Stock
   These are the regular supplies needed to meet normal sales demand and are typically replenished on a regular basis.

4. Seasonal Stock
   Such stocks are bought ahead of particular seasons or promotions, such as Christmas inventory.

Inventory and Stock Control Best Practices

You can improve your company’s bottom line by effectively utilizing inventory and stock management. Here are some best practices:

1. Use Inventory Management Software
   Software such as Britecheck automates inventory and stock levels by automatically collecting data, monitoring sales, and forecasting demand.

2. Implement Demand Forecasting
   By knowing customer demand trends, you can be sure to keep stock levels at a healthy level without over-production or stockouts.

3. Track and Organize All Sorts of Inventory
   Divide your inventory by type (raw materials, WIP, finished products, etc.) to accurately track the entire manufacturing and selling process.

4. Monitor Turnover Rates
   The inventory turnover rate is an important indicator of how often you sell and replenish inventory over time. It’s an excellent metric to determine if you’re too rich or too poor.

5. Optimize Reordering Processes
   Automated reorder points help to avoid stockouts and over-stocking. Almost every inventory management program lets you configure points to reorder each item, triggering an order automatically when the stock runs low.

How to Avoid These Pitfalls and How To Prevent Them

1. Overstocking
   Unwanted stock clogs up valuable cashflow and adds to storage expenses. Keep this from happening by predicting demand well and setting reorder points.

2. Understocking
   Stockouts will damage your sales and customer satisfaction. Bring buffer stock for hot products and keep your inventory levels up to date.

3. Inaccurate Tracking
   Mismanaging stock can result in financial report errors and cash flow problems. Accurate barcode scanners and inventory software.

4. Lack of Real-Time Data
   If we don’t have real-time data, companies are forced to make decisions based on historical data. Software, such as Britecheck, allows you to see what’s happening in real time, so you know what’s happening.

Inventory and Stock: Industry Case Studies

As a way to grasp the difference, consider a few industries as a benchmark:

• Retail
  A shop’s stock would consist of its entire wardrobe of clothes, shoes and accessories. Its stock would be defined as anything on the sales floor and in warehouses that can be sold at the first opportunity.

• Manufacturing
  A car producer’s warehouse contains raw materials (steel, rubber), WIP (incomplete vehicles), finished cars, and MRO products for machine maintenance. Its inventory would consist solely of completed cars awaiting dispatch to dealerships.

• Food Service
  In a restaurant, inventory comprises raw ingredients, cutlery and detergents. The stock, however, are menu items prepared for sale to customers at the onset.

Summary

It is important to be able to know the inventory and stock difference in order to manage your business. They might sound interchangeable, but these words mean different things for everything from accounting and budgeting to supply chain management and customer experience. You’ll be able to make smarter choices and move your business forward by understanding when and how to use each term.

If you are looking to automate your inventory and stock management, Britecheck has a one-stop solution for small businesses. From stock count to inventory type, Britecheck allows you to manage everything organized and updated in real time.

Are you ready to manage your stocks and inventory? Sign up with Britecheck today!