What Is an Inventory Profit?

Esther Ejim

Inventory profit is an economic term used to describe a rise in the value of goods that are already in the inventory of the business, without any extra effort by the business to influence such an increase. That is to say that such an increase in value occurs due to other macroeconomic factors that are not originated from the business itself. As such, an inventory profit is merely incidental and is considered to be something of a fluke rather than any type of solid business growth for a company. Once the factor is corrected, the profit will cease.

A man checking inventory.
A man checking inventory.

Most times, companies that produce, supply or retail goods have some in their inventory or storage at any time that they supply to their customers or to other branches of the company as needed. For instance, most retail stores have large warehouses where their inventory is stored and sorted before delivery to any of their branches that might need anything from the goods in storage. The application of inventory profit means that the value of the goods in the storage will appreciate beyond what the company normally makes from them due to external factors.

Inventory profit can occur when inflation takes place while goods are being held in storage.
Inventory profit can occur when inflation takes place while goods are being held in storage.

The main factor that contributes to this type of profit is the incidence of inflation that occurs while the goods are held in the storage. Inflation refers to a situation where the same goods will be bought by consumers at a higher amount than before due to factors like excessive demand and the devaluation of the currency. For instance, if the company has an inventory that normally sells at $1,000,000,000 US Dollars (USD), after an inventory profit, the same goods could sell for $1,000,200,000 USD, meaning that there has been an appreciation of 20 percent. This 20 percent increase is the inventory profit.

Even though inventory profit is mainly passive and does not require any input from the suppliers, retailers and manufacturers, sometimes they may try to influence the inventory price themselves by creating an artificial scarcity, causing the price of the goods in the inventory to appreciate in response to the demand. For instance, jewelers could create the impression that pink diamonds are exceedingly scarce, even if they have a large inventory of the same type of diamonds. Where this is the case, the apparent scarcity may cause the value of the pink diamonds to increase to a level that may be up to twice its normal amount. The increase in the value of the pink diamonds is the inventory profit.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?