Chapter 1

What is inventory?

Your inventory is one of the most important purchases you’ll make. It’s the reason you’re in business.

Inventory – or stock – is what your business buys in order to resell to customers. It may be changed in some way, or sold as it is.

For something to be inventory:

  • You must have bought it: If you’re selling something on consignment, it still belongs to the manufacturer or supplier. That’s not your inventory – it’s theirs.
  • It must be for sale: Things that you’ve bought to help run your business – such as stationery or work tools – aren’t inventory.

Only items that are kept by your customer are inventory. The tools you use along the way are not.

Why have inventory?

You could just order what you need, exactly when you need it. And some businesses are able to operate on a just-in-time system like this. But for most businesses, it’s impossible to organise such a precise supply chain.

Having inventory on hand has a number of benefits. It lets you:

What should I do about inventory?

If your business has inventory – and most do – there are a few things you’ll need to do:

  • Report it to the right people – inventory contributes to the value of your business, so it must be reported on tax returns, business valuations and insurance policies.
  • Manage it smartly – inventory can both make and lose money for your business, so you need to put some thought into how and when you order and store stock.
  • Keep on top of the numbers – to correctly report and manage inventory, you need to understand the cost and value of it. That’s where inventory accounting comes in.

This doesn’t have to be as hard as it sounds. There are accounting tricks to make it easier on small businesses. As you grow, you can use software and apps to do a lot of the time-consuming jobs, and number crunching.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

Guide to inventory

Inventory management is more than just knowing what’s been sold and what you’ve ordered. Find out what else is involved.

Download the guide to inventory

Learn the strategies and techniques behind successful inventory management. Fill out the form to receive our inventory guide as a PDF.

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