ABC Analysis

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ABC Analysis
What is it?
There is nothing simpler than a business set up- gather capital, invest it with a proper business plan in mind and reap the profit! However the mechanisms involved in the second step of the process involves a lot of calculations, prior proper planning and formulating effective business methods. Generally if it is a small business set up the steps are simple but as the business continues to expand, the number of assets of the company increases and to maintain these assets properly some effective techniques need to be followed. The ABC analysis method is one such technique. This method involves classifying the inventory of a company into three categories, namely A, B and C.
These categorizations are based on the importance of the inventory of the company. A stands for very important and B and C follow in a descending order. This analytical classification helps in prioritizing the various assets of the company and handling them accordingly. For example suppose in a retail shop, there are three customers. While one customer wishes to purchase a lot of dresses for a wedding ceremony, another wishes to purchase only a few for an upcoming event, while the third one simply wants to buy a single regular wear dress. Obviously the first customer, who also happens to be a regular, will generate more profit to the business. So based on the ABC method of classification the first customer will be classified as A, the second customer as B and the third customer as C. This classification, as we can see, has been done on the basis of priority that is to be allotted to these customers.
What is an inventory?
The main things that are classified on the basis of these classifications are the inventories. Now, what are inventories? Inventories of a company are the goods which have either been completely processed or are in the middle of being processed or are available in the raw form. These inventories are essential because they are considered to be the

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