Let us first define what is a stock. In accounting, there are 2 common definitions of a stock. One is a type of security that signifies ownership in a company and represents a claim on part of the company’s assets and earnings. There are 2 kinds of stocks: the common and preferred. Common stocks are those stocks that usually entitles the owner to vote at the shareholder’s meetings and receives dividends. Preferred stocks, on the other hand, does not have voting rights, but has higher claims on assets and earnings than the common stocks. The second meaning of stock refers to the products on hand which is to be sold to the consumers. In this scenario, it is often termed as inventory.
Having an inventory means that you have a complete list of items such as property, goods in stock or contents in an establishment. You can do your list by doing in inventory count. Inventory count helps you to keep track of your stocks. During an inventory count, you count and record each item in your store. Inventory counts help you to keep on top of your stock movements and identify discrepancies faster. There are 2 types of inventory counting: full and partial. Full inventory count is completed annually to provide the accountant with an exact value of the inventory. On the other hand, partial counts are in a small section of your inventory, usually a particular brand, type or supplier’s item.
But because of discrepancies, usually, a company can hold stocks especially when there is a low demand count on that specific periods.
What is stock holding?
Stock holding means that the production of the company’s goods or products is being kept for use in the future. Inventory is considered as one of the most important assets of a business. While holding either too much or too little stocks places a worry on productivity and profit, it is essential to hold a sufficient number of products on hand at all times. Holding stocks ensures customer services targets can always be met without compromising cash flow or running out of stock. When customers cannot purchase what they need, they often cease to be customers. As a result of missed sales, customers jumping to another competitor or paying on the surplus stock that is no longer in demand, losses are inevitable. That is why inventory and how much of it a business chooses to hold is a vital concern.
Advantages of holding stocks
- Quicker response time- without having to worry about waiting for your stock to come and ship their order out. You can easily and quickly fill customers order as soon as they come in.
- Decreased risk of shortages- because of holding stocks, you are able to guarantee that you will not run out of a particular item and have stress-free on a product that is discontinued.
- Quick replenishment- because you are keeping excess stocks, you are able to work with your full stocks and your store is always neat and tidy in appearance.
- Avoids loss of sales- it avoids any possibility of losing the customer’s patronage of customer and thus sales.
- Gains quantity discount- if a company order larger order of certain goods or products, the suppliers will provide generous quantity discounts by reducing the price. This discount will decrease the price of products and increase profits earned on sale.
- Reduces order cost- by making a bulk of orders, the number of orders will decrease and minimize the cost involved.
- Achieve efficient production runs- when a company sets up its production line, it will increase its startup cost. Stock holding to make sure the production line will never run out of materials will provide secure, longer run in a production line, thus lower the additional cost.
- Reduces risk of production shortages- an inventory is required in this situation. Because if one single component run out of stock, the entire production line could be stopped. To avoid this, proper inventory management should be ready.
Disadvantages of holding stocks
- Tying up cash flow- the more inventory you have on stock, the greater amount of business capital is hold up, too. There is a possibility of slower business cash flow.
- Obsolete inventory- the longer you keep a product, the lesser the quality and value it offers.
- Item not sold- because of keeping stock on hand, there is a possibility that you misjudged what will and what will not sell. And because of that, your company could end up with a larger quantity of items on hand that people will not buy. And because of this, putting a product on sale or discount will be your best solution.
- Higher storage costs- excess inventory means having extra space for storage. Extra space means extra cost and because you need to include those extra costs in your price, you will lose through your competition because your price is too high.
- Risk of natural disasters- having excess inventory will have increase loses if ever fire or damages will happen. The lesser stock on hand will have lesser lose.
- Higher insurance premiums- the more inventory you keep and the longer you keep it, the more insurance you pay for it.
To manage your stock successfully, you need to have the balance between the disadvantages and benefits of holding stocks. The costs of holding stock include the money you have spent buying the stocks as well as the storage and insurance. The benefits include having enough stock on hand to meet the demand of your customers. You need to keep in mind that having too much stock means extra expense because it can lead to a shortfall in the cash flow and have extra storage costs. Although having too little stock means lost income in the form of lost sales. Having the wrong stock means lost income in the form of lost sales and poor customer service.
Having the right stock and being able to sell it can lead to increased sales, new customers, increased customer loyalty and confidence, improve cash flow and possible new investors.