What Is Effective Stock?

Terry Masters
Terry Masters
Businessman giving a thumbs-up
Businessman giving a thumbs-up

Effective stock is the total amount of inventory a business has on hand, plus the amount of inventory on order but not yet received. It is a way for a business to determine inventory needs without overestimating or underestimating based simply on what is viewable on the shelves. Many businesses use a computer-based inventory system that is integrated with an accounting system to make it easier to track effective stock levels.

Inventory management is one of the most important operational processes for any business that maintains an inventory. At any point, a significant portion of a company's cash can be tied up in its inventory. Having too much stock on the shelves and in storage means that the cash spent on that inventory is not available for other business needs, such as advertising. Too little inventory on hand means that customers might not be able to make purchases immediately, because products are out of stock.

To effectively manage a business, staff must figure out how much stock must be kept on hand at any one time to meet demand. This decision is specific to every individual business and is based on how fast products sell and how quickly suppliers can fill a replenishment order. Determining the correct inventory turnover rate and appropriate stock levels allows businesses to keep cash available for other uses, instead of tying up cash on stock that might sit on the shelves for months before being sold.

As a business manages and evaluates its inventory processes, it keeps track of what is on hand through an inventory control system. It also tracks orders placed with suppliers through its accounting system, so it knows what it has paid out in inventory costs. The integration of these two processes enables businesses to determine the effective stock level, or the amount of stock that has been purchased, whether or not the stock is currently sitting on the shelf.

Technological advances have changed the way businesses manage inventory and accounting systems. Modern systems use computerized databases that make extracting and analyzing information easier. Many retail businesses, for example, use an integrated point of sale system that allows staff to track inventory, manage sales and record transactions in the company's books. Determining the effective stock level in a business that uses this type of system is a simple matter of printing a report.

Businesses can still determine effective stock levels by hand, of course, but it takes a bit more effort. Staff must first establish the current inventory level by doing a count or checking records. Invoices for open orders of inventory that have yet to be delivered must be pulled. The inventory reflected on the invoices should be added to the physical inventory on hand to determine a company's effective stock.

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