Understanding the difference between inventory and supplies is vital for your business’s success. They are key to your budget, daily operations, and sales. Many people use these terms interchangeably, but they have distinct meanings in business. Knowing these differences will help you manage them better.
In this blog post, you’ll learn about stock, supplies, and equipment and how each one is unique.
Inventory vs Supplies: Definition
The essential items you consume during your routine business operations refer to as ‘supplies’.
For example, soap is a fundamental cleaning supply. Restaurants need it to clean dishes, while other businesses also need it to maintain a clean environment. Packaging like paper bags is another example of supply used in restaurants and other companies that need to ship products safely.
Conversely, inventory is the raw materials you plan to transform into a product, work-in-process, and completed product. Inventory includes different items that businesses use or sell.
For example, a coffee shop keeps raw coffee beans. These beans are the start of everything they sell. They grind and brew them to make the coffee we drink. Also, think about a catering company that often has meals they’ve already cooked and frozen. These meals are ready to go and just need to be warmed up. So, the beans and the meals are both types of inventory, but at different stages. The beans are the beginning, and the meals are the end, ready for customers.
Related Article: Excess Inventory: How to Avoid Surplus Inventory Items
What Are The Differences Between Inventory And Supplies?
Now that you know what inventory and supplies mean, let’s explore how they differ.
1. Expenses
Your business incurs ‘fixed’ or ‘variable’ expenses. Typically, ‘fixed’ expenses include regular payments like rent. However, your current situation affects ‘variable’ costs, making them likely to change. For example, the quantity of raw materials you purchase depends on the forecasted demand.
Therefore, inventory vs supplies are viewed differently in terms of expense. In the case of inventory, raw materials are usually variable expenses since they need to be adjusted to demand. For instance, if you make candles, the quantity of wax you buy will depend on your peak selling periods.
Conversely, you often consider supplies as fixed costs. This is because you need them for daily operations ― even if your sales reduce. For instance, regardless of how many customers a hair salon gets, they still need soap to mop the floor each night.
2. Accounting
When it comes to supplies vs inventory, you must list both types of items on your balance sheet. However, they will reflect differently in your accounts.
Therefore, the supplies you have yet to consume are listed as assets. However, you can list them as expenses once you have used them.
Similarly, you list inventory as a current asset, whether in shipment or storage. However, you must enter these items as ‘cost of goods sold’ or ‘product revenue’ once you sell them.
3. Management
‘Inventory management’ is different from its supply counterpart. Firstly, inventory management involves:
- Receiving Stock
- Tracking Inventory
- Organizing Stock
- Recording Inventory
- Creating Reports on Stock
- Optimizing Storage
- Auditing Stock
- Forecasting Demand and Outages
Essentially, inventory management ensures that you have the optimal level of stock, which reduces unnecessary costs.
On the other hand, when you manage your supplies, you deal with small quantities of items. And so, you don’t need to track supplies with the same effort. However, you still need to record how fast you consume your supplies and take notes to replenish them on time. If you run out of these items, your business operations may be delayed.
Additionally, an accurate record of your supplies will help you keep track of your expenses for accounting purposes.
4. Sales Tax
To begin with, sales tax is a percentage of the price your customers pay when they purchase a product or a service. And so, it affects the price you set for your goods and services.
In inventory vs supplies, sales tax is treated differently. Actually, the inventory does not incur sales tax.
On the flip side, you have to pay this tax when you buy supplies. Nevertheless, there are exceptions and outliers. For instance, while the average sales tax is typically below 8% in the USA, the state of Alaska has 0%.
Related Article: What is Work in Process (WIP) Inventory and How to Calculate It
The Difference between Supplies and Equipment
Equipment is the tools you use multiple times to transform your raw materials into stock you’ll sell. Though you use equipment in your business operations, you don’t ‘consume’ them, unlike supplies.
Here are examples of equipment:
- Printer
- Forklift
- Oven
- Hammer
- Server
These tools remain in use for prolonged periods. Therefore, you classify them as a fixed, non-current asset in your balance sheet, unlike supplies, which quickly become expenses. Alternatively, you can consider equipment a liability.
Since tools are long-term assets, you manage them differently from supplies. Besides recording their quantity and forecasting procurement needs, you also need service tools. This extends the life of your tools, prevents accidents, and avoids operations delays due to broken equipment.
Eventually, your equipment will break down or otherwise become obsolete. And so, you need to keep records of the depreciating value of your tools every period. Once they’re obsolete, you’ll write them off as fixed assets to keep your accounts accurate.
Conclusion
Thus, understanding the inventory vs supplies comparison is crucial to running your eCommerce business efficiently. The major difference is that an inventory comprises items you plan to sell, while supplies are things you ‘consume’ as a business. When it comes to management, expense designation, assignment in the balance sheet, and sales tax, you’ll deal with them differently due to the described differences. Also, understanding equipment is crucial to differentiate it from the supply and inventory. Ultimately, this comprehensive understanding ensures you allocate resources wisely and maintain effective control over your finances.
