Small Business Glossary of Terms

Our glossary breaks down important inventory management and accounting terms and acronyms, giving small businesses the knowledge needed to streamline inventory processes, control costs, and optimize their finances.

3PL (Third-Party Logistics)

3PL refers to the outsourcing of logistics and supply chain functions to external providers. It involves hiring a company to handle inventory, warehousing, shipping, and even inventory management in order to reduce costs and grow businesses.

5S Methodology

The 5S methodology is a set of guidelines used to organize and maintain a clean, efficient, and productive work environment. Originating from Japan, it is a systematic approach that groups five behavioral "pillars" into the following terms: Sort, Set in Order, Shine, Standardize, and Sustain. Adopting the 5S methodology can help optimize warehouse logistics.

80/20 Rule

The 80/20 rule, also known as the Pareto Principle, refers to the notion that 80% of the effect comes from 20% of the causes. It can be applied to various businesses to improve organizational productivity and efficiency. In the context of inventory management, the 80/20 rule involves identifying the most important items or factors (20%) that contribute to the majority of a company's sales outcomes (80%).

Accounts Payable (A/P)

Accounts payable refers to money the business owes to its suppliers and creditors. In accounting, it falls under the 'Current Liabilities' category.

Accounts Receivable (A/R)

Accounts receivable refers to money owed to the business by customers for goods or services delivered. In accounting, it falls under the 'Current Assets' category.

B2B

Business-to-business, or B2B, refers to the transactions, relationships, and services between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer. It differs from B2C (business-to-consumer) in that companies in a B2B model sell products or services to other businesses, not individual consumers.

Barcode System

A barcode system is an essential tool for businesses and organizations aiming for a digital transformation in inventory management. Barcodes are symbols made up of a combination of black bars and white spaces which represent information about a product. A proper barcode system can help reduce errors in product and inventory management while saving on labor and administrative costs.

Bill of Materials (BOM)

A bill of materials is a detailed list that includes the costs of materials, parts, and components required for manufacturing specific products. It provides guidelines for creating products by specifying the quantities and relationships between different parts.

Bullwhip Effect

The bullwhip effect refers to the phenomenon where small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. It can lead to inefficiencies in the supply chain, such as excess inventory, increased costs, reduced customer satisfaction, and poor resource utilization.

Cash Conversion Cycle (CCC)

The cash conversion cycle measures the time it takes for a business to convert its inventory investments into cash flow from sales. Effective inventory management can shorten the CCC, improving cash flow.

Current Assets

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within a year.

Current Liabilities

Current liabilities are obligations that the business needs to pay off within a year, such as accounts payable, short-term loans, and other short-term debts.

Cost of Goods Sold (COGS)

Cost of goods sold refers to the total cost of producing or purchasing the goods that a company sells in a specific period. it includes direct costs like the cost of raw materials and manufacturing labor, but does not include operating expenses like commercial rent, staff salaries, and advertising expenses. COGS can reveal how much it costs a company to make or buy the products that they sell to customers.

Demand Forecasting

Demand forecasting is the process of predicting how much of a product or service customers will want in the future. Businesses estimate future customer demand by collecting data, analyzing trends, and making predictions to make better business decisions.

Dropshipping

Dropshipping is a retail model in which a store sells products to customers without keeping the items in stock. Instead, the business partners with a supplier who handles inventory management and shipping directly to the customer.

Economic Order Quantity (EOQ)

EOQ is a formula used in inventory management to determine the optimal order size that minimizes total inventory costs, including ordering and holding costs. In simple terms, it’s the best amount of inventory to order to reduce expenses while meeting demand.

Enterprise Resource Planning (ERP)

Enterprise resource planning is a type of software that helps businesses manage their core processes and day-to-day activities, including HR, accounting, and supply chain, and more. ERP systems can help companies automate and streamline many of their operations with a central database for decision-making.

First In First Out (FIFO)

FIFO (First-In, First-Out) is a common inventory valuation method used to manage inventory costs and calculate the cost of goods sold. In FIFO, the oldest inventory items are sold first, reflecting how inventory often moves.

Inflation

Inflation is the rate at which the prices of goods and services rises, leading to a decrease in the purchasing power of a currency. It reflects the ongoing increase in the cost of living and can have significant impacts on both consumers and businesses. It's important to consider the effects of inflation on the cost of goods sold and inventory valuation methods.

Inventory Count

Inventory count, also known as inventory audit, refers to the process of physically counting and verifying the quantities of items on hand at a specific point in time. It ensures that the recorded quantities in a company’s inventory management system match the actual physical quantities in stock. Inventory counts help maintain inventory accuracy by finding discrepancies, making reconciliations, and eliminating errors.

Inventory Management

Inventory Management is the process of managing and organizing a company's inventory by tracking stock levels and orders to meet customer demand while minimizing costs. It refers to the full range of activities and processes used to maintain optimal inventory levels, ensure accuracy, and streamline operations.

Inventory Financing

Inventory financing is a way for businesses to get money to buy or manage their inventory through a short-term loan or line of credit. A lender will provide money for a business to buy or manage the products to be sold, using the inventory as collateral or security for the loan.

Inventory Turnover Ratio

Inventory turnover ratio evaluates how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory held during a specific period. A higher inventory turnover ratio generally suggests that a company is efficiently managing its inventory, while a lower ratio may indicate overstocking.

IT Asset Management (ITAM)

IT asset management is the practice of managing and optimizing an organization's IT assets, including both hardware, software, and digital data. Effective ITAM enables organizations to allocate their resources effectively, mitigate security risks while ensuring compliance with industry regulations, and improve operational efficiency.

Just-In-Time (JIT)

Just-in-time inventory is a management strategy to optimize inventory levels and reducing waste by receiving goods only as they are needed in the production process. It reduces the amount of inventory on hand, freeing up cash, reducing carrying costs and ultimately minimizing inventory costs. JIT is widely used in manufacturing and other industries to increase efficiency and reduce waste.

Last In First Out (LIFO)

LIFO (Last-In, First-Out) is a common inventory valuation method used to manage inventory costs and calculate the cost of goods sold. In LIFO, the most recently purchased inventory items are sold first so that it accurately reflects the current market prices for inventory. It can also provide tax benefits in inflation.

Lead Time

Lead time refers to the product's manufacturing time from beginning to end. It measures the time it takes for an order to be fulfilled from the moment it's placed. Longer lead times can result in higher carrying costs and stockouts, as well as customer dissatisfaction.

Logistics

Logistics is the process by which goods, services, or information move from manufacturers or distributors to consumers. It involves planning, managing, and coordinating the movement of goods and services to make sure they get to the right place at the right time via warehousing, inventory management, order fulfillment, and supply chain management.

Minimum Order Quantity (MOQ)

MOQ refers to the smallest number of units or products that a supplier is willing to sell to a buyer in a single order. It's the minimum quantity of products that must be ordered to ensure cost-efficiency for the supplier or manufacturer.

Picking Error

Picking errors occur when the wrong items are selected or picked during the order fulfillment process, usually due to poor warehouse layout and inaccurate inventory records. They can lead to customer dissatisfaction, increased costs, and operational inefficiencies. Proper warehouse organization is crucial to prevent picking errors

Overstock

Overstock, or excess stock, refers to having more inventory on hand than is needed to meet the current demand. It can lead to increased costs and various operational inefficiencies for a business. To prevent overstock, it's crucial to implement inventory management systems to monitor inventory levels in real-time.

Re-commerce

Re-commerce refers to the consumer trend in which people buy and sell previously owned or used products. It enables buyers to reduce, reuse, and recycle, enabling eco-friendly practices through the online marketplace.

Reverse Logistics

Reverse logistics refers to the logistics process of returning products from customers back to the suppliers, organizations, or companies that originally produced them. This includes returns, recycling / reprocessing, and disposal of (damaged or defective) products.

RFID (Radio Frequency Identification)

RFID refers to technology used to identify and track items using radio waves. In simple terms, it’s like a modern barcode that uses radio signals to track and manage inventory or assets. Typically, businesses attach RFID tags to items for automatic identification and real-time tracking.

Safety Stock

Safety stock represents the extra inventory held to prevent unforeseen inventory shortages. It helps businesses from running out of products to meet consumer demand by maintaining extra stock in the back.

Stock Keeping Unit (SKU)

A stock keeping unit is a unique, alphanumeric code or identifier that distinguishes products in a company's inventory. It reveals characteristics of the item like size, color, manufacturer, and is used to assist in simplifying inventory control and optimizing product assortment.

Stockouts

Stockouts, or low stock, occur in inventory management when a business runs out of a specific item that is needed to meet customer demand. It can lead to lost sales, decreased customer satisfaction, and production disruptions. Therefore, proper inventory tracking and inventory control systems, as well as regular inventory audits are crucial to prevent stockouts.

Supply Chain

Supply chain refers to the processes involved in producing and delivering a good from raw materials to the end customer. The term encompasses various components such as sourcing, manufacturing, warehousing, and distributing.

Vendor Managed Inventory (VMI)

Vendor managed inventory refers to the strategic alliance where suppliers manage and replenish inventory based on real-time data shared by customers. It's a supply chain strategy where the supplier manages the inventory levels for the customer by monitoring their inventory data and making replenishment decisions to maintain optimal stock levels.

Warehouse Management System (WMS)

A warehouse management system is a software application to help manage and optimize warehouse operations, including the movement and storage of goods within a warehouse and processing the transactions (i.e. receiving, picking, packing, and shipping). WMS facilitates improved inventory control and operational efficiency.

Weighted-Average Cost (WAC)

The weighted-average cost (WAC) method is a way to calculate the average cost of inventory items and determine the cost of goods sold. It's used to figure out how much each item in inventory costs on average, considering both the costs of old and new inventory.

Working Capital

Working capital is the difference between current assets and current liabilities, and is a measure of a company's short-term financial health. It represents the funds available to meet day-to-day operational expenses. Effective working capital management is important for small businesses to ensure operational efficiency, reduction in costs, and continuous growth.

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