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Business and Financial Policies and Procedures

Assess Your Merchandise Inventory Management Practices

Policy Statement

All units with merchandise for resale, regardless whether the perpetual or periodic inventory method is used, must manage and control their merchandise inventories using sound business and accounting practices.

Units must document all inventory management procedures and make them available for review by external auditors and UAFR. Review these procedures periodically and update as needed to meet changing business needs.


To assess your merchandise inventory management practices:

  1. Familiarize yourself with University of Illinois System, university-specific and unit procedures in place to order, stock, store, and retrieve your merchandise inventory, the space (physical location) used to store your inventory, and the costs associated with maintaining that space. Review any related documentation of your unit's inventory practices. Remember that good inventory management:
    • Makes best use of available space
    • Minimizes storage costs
    • Ensures that you actually have goods available to sell
    • Allows your unit to take advantage of quantity discounts available
    • Minimizes the length of time between order and receipt of items
    • Considers shelf life
    • Addresses the opportunity cost of not having goods on hand to meet sale requests
  2. At least once a year consider the following questions:
    • Is the space used adequate to manage inventory levels? Does staff encounter problems storing the quantities needed to supply customers on demand or are large portions of space unused?
    • Do significant quantities of inventory remain in storage for long periods of time before sale?
    • Do records of sales orders show delays in delivery of goods due to inventory shortages?
    • Do reviews of physical inventory listings reveal that particular items have remained in storage without significant sales for extended periods of time?
    • Are your internal unit inventory management procedures fully documented and up to date?
    • Could smaller or less expensive storage be utilized without negatively affecting sales?
    • Does the level of inventory on hand exceed total sales for the past twelve months? If so, items will have to be transferred, returned to vendors, or otherwise removed to comply with state regulations.
    • Do orders for new items undergo competitive pricing and should you consider the potential for quantity discounts?
  3. The answers to these questions will identify possible risks or weaknesses in your unit's current inventory management practices. Your unit can then implement process changes that provide the most significant and cost-effective benefits. Be sure to update your documentation to reflect any changes.

Related Policies and Procedures

Monitor a Self-Supporting Fund
Conduct a Physical Inventory to Adjust Your Merchandise Inventory Record

Additional Resources

Methods of Merchandise Inventory Valuation

Last Updated: January 7, 2019 | Approved: Senior Associate Vice President for Business and Finance | Effective: January 2013

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