How to Decide Between an Inventory Management System or Asset Tracking System
In our line of work we often get requests like, “I need an inventory management system for our tools.” Or “I need to track our inventory of laptops and projectors.” Both are technically correct appeals for help. But, as we shall see, the kind of software that you adopt depends on how you classify your assets.
Here, we’ll help you remove any confusion about whether you need an inventory management system or an asset tracking system. Both track and manage physical things but their objectives and end-results are very different. Get the distinction right and understand what they manage. Then you’ll be better prepared to implement these systems in your business.
Importance of Fixed Assets Versus Inventory
Some small businesses can get confused between what is a fixed asset or inventory. Sometimes inventory and fixed assets are mistakenly lumped together or collectively described as “assets” in reports. However, not all assets are necessarily inventory.
This difference is important for a couple of reasons:
1. Both sit on your balance sheet. But they differ in their impact on your bottom line and representation in your financial reports.
2. You need to report accurate inventory figures for tax purposes. They affect your profit or loss, and thus taxable income. Thus, tax authorities will take an interest in the movement of your stock in-and-out of your business.
3. Your choice of software solution depends on the type of your assets. The software solutions are not interchangeable and they target different assets.
Now for a Completely Fictitious Example
Sweets That Tweet Limited was founded in 1955 by your grandparents. Any relation to a certain popular social media platform is a mere coincidence. Customers back then would commonly whistle and exclaim loudly after popping one of your sweets in their mouths. Hence the name stuck with the business.
Everything has been going fine and dandy using paper-based ledgers and inventory tracking sheets in the business. But since coming on board you’ve been wanting to overhaul operations by implementing state-of-the-art asset tracking and inventory management cloud applications.
What is Inventory?
Simply put, inventory is the stuff that you sell to make a profit.
It includes finished goods in your warehouse, work-in-progress and raw materials. Here, you use inventory management systems to manage your inventory levels.
At Sweets That Tweet Limited, inventory is made up of finished sweets in packets and boxes, some large-scale candy installations that are work-in-progress, and all the raw materials used for candy making, including sugar, cacao powder, coloring and flavorings.
Interestingly, inventory is classified as an “asset” by accountants. More specifically, it is a “current asset” because you have every intention to sell them within the next 12 months. Other current assets include accounts receivables and prepaid business expenses, for example, small business insurance policies.
What Are Fixed Assets?
To make it short and sweet, fixed assets are physical things used to purchase, produce and sell your inventory. They include property, machinery and tools.
Accountants call them “fixed assets” because they are semi-permanent in nature. They have an expected useful life before you retire, scrap or sell them.
You don’t normally depend on the sale of fixed assets in the ordinary course of your business. So they’re not inventory. Here, you use asset tracking systems to manage your fixed assets.
For Sweets That Tweet Limited, their fixed assets include the candy factory, all the equipment used to flatten, stretch and pull candy, and tools such as rolling pins, heat-resistant gloves and cutters. They also have numerous delivery vans and forklifts to move stock around.
As you can see, the look, size and other characteristics of an asset play no part in deciding whether it is a fixed asset or not. The test is whether they are used in the usual course of your business.
For example, you might run another business that distributes heavy industrial equipment. Your inventory includes plant equipment, pallet jacks, forklifts and just about anything that heavy industry requires. These things are considered inventory because they exist in your business for the sole purpose of being sold. They are not used in the ordinary course of your trading business.
In summary, your inventory is a current asset. Property, machinery and tools are fixed assets.
Over at Sweets That Tweet Ltd, they list their balance sheet as follows:
Cash in the bank
Raw materials (sugar, cocoa, flavorings, coloring, etc)
Work-in-progress for large candy installations
Candy making machines
Furniture and fixtures
Delivery vehicles and forklifts
Now, back to the introductory examples. If you’re in the business of buying and selling tools, laptops or projectors, then you need an inventory management system as these are trade goods and thus belong to your inventory.
However, if the same tools are used for light assembly of products, and the laptops and projectors are used by your salespeople, then you need an asset management system as these are fixed assets.
Now that you’ve identified the right software for the right assets, we’ll cover the purpose and features of typical inventory management systems and asset tracking systems next.
Role of Inventory Management Systems
Your accounting department considers inventory a current asset. Thus, you are motivated to sell and turn over your stock in the next 12 months. Any longer and they’re considered dead stock. Not an enviable position where you need to write down losses for these stock.
So, the main purpose of an inventory management system is to help you turn over your stock quickly. Software, such as EMERGE App, does this by managing your orders, purchases and inventory in your business. Along the way, it throws in features that also help you increase efficiency, improve productivity and lower the costs associated with holding stock.
1. Real-Time Information
Modern inventory management software uses a perpetual inventory system. Information about your inventory is updated continuously, giving you real-time information at your fingertips. So, you should know the available quantity that you can sell and the physical quantity in your warehouse at any point in time.
Accordingly, information empowers your salespeople in the field to sell better and faster. Being better-informed means that they can push orders for products for which you have in-stock quantity. Or sell alternatives for those products in a stock-out position. This improves your inventory turnover and order fill rate.
At Sweets That Tweet Limited, candy worms are their all-time best seller. Retail customers buy them by the pallet no matter the season. Some customers even bake with them! Here, we can see that the in-stock quantity is 800 packets. However, in reality only 710 packets are actually available. Sales orders account for the other 90 packets of sweets.
2. Inventory Control
Inventory, as a current asset, has considerable value in your business. Buy too much of it and you risk tying up working capital. Plus, you face the possibility of losses from damage, theft and obsolescence. On the other hand, buy too little and you experience stock-out situations, lost sales, and a drop in revenue. This is a delicate balancing act faced by all businesses that deal in physical goods.
Hence, an inventory management system aims to help you achieve an optimal inventory level. Sales reports show you which products are selling well and thus moving fast. They also show you your most profitable products. This enables you to double-down on these while cutting orders for others. Thus, better sales forecasting together with seasonal adjustments lets you make informed purchasing decisions.
While inventory awaits their sale, you also need to track the whereabouts of them. When products move you need to know every adjustment, purchase, sale, return and exchange via inventory movement reports. For warehouses, you should be able to purchase, receive and stock goods in different warehouse locations and sub-sections. And know the inventory list for each warehouse.
3. Workflow Efficiency
Moving to a sophisticated inventory management system isn’t complete without time-saving shortcuts. An ideal system should save you from mistakes and time-consuming chores. It should automate calculations wherever possible.
For example, importers will appreciate automatic tabulation of customs, insurance and freight costs. The system then proportionately applies these costs to the items in the purchase order. Exporters will also welcome the automatic calculation of CBM and the auto-generation of a packing list for customs purposes.
For Sweets That Tweet Limited, their twisted marshmallows are another best seller. Here we see that the inventory management system has automatically calculated their average cost price and average landed cost, as well as their last purchase price and last landed cost. This gives you a useful summary to help you price twisted marshmallows in the market.
Purpose of Asset Tracking Systems
Your business depends on a lot of fixed assets to purchase, produce and sell your inventory. Things such as computers, equipment, tools and vehicles have a useful life in your business. You then disposed of them due to wear and tear or obsolescence.
For accounting purposes, your balance sheet shows fixed assets at their original cost. Thus, you need an asset tracking or management system to know their current market value and the amount they have depreciated by.
Therefore, an asset tracking system calculates the depreciation of the fixed assets used in your business. It maintains a central record of all fixed assets, schedules regular maintenance to prolong their useful life, and tracks their use for accountability and control.
1. Calculate Depreciation
A typical asset management system uses various methods to calculate depreciation:
1. Straight-line. Simple calculation of the initial cost of an asset divided by its useful life.
2. Double declining balance. Assumes that the fixed asset depreciates the most in the first few years of its useful life.
3. Sum of the year’s digits. An accelerated depreciation method that assumes the productivity of an asset drops over time.
2. Schedule Maintenance
Asset management systems should record and schedule maintenance for your fixed assets. Regular maintenance is advisable as you wish to maximize their useful life. Since your fixed assets come in all shapes and sizes, the system should handle different needs for each one. For example, oil changes for vehicles, drum replacements for photocopy machines, and calibration and tuning for factory equipment.
3. Track Fixed Assets
Finally, asset management systems should track the users of assets using a register. Each fixed asset needs a serial number attached and entered into the system. You need to register each user in the system because your fixed assets have considerable value. A sign-out/sign-in process provides accountability in case of loss, theft or damage.
We’ve made a clear distinction between fixed assets and inventory in your business. You need to distinguish them for financial reporting purposes, tax obligations and the choice of software used to manage them. Inventory management systems handle the goods that you sell. Asset tracking systems manage the fixed assets used to sell your goods. Thankfully, both systems can co-exist in a business but match them to the right purpose.