Do Software Companies Have Inventory? Here's What We Found Out.


If you work in the software industry, then you're probably familiar with terms like inventory management system and inventory tracking. But what does it mean? Do software companies have inventory? Do they track it? What do they do with it when they don't need it anymore? Read on to learn more about the basics of inventory management in the software industry and to find out how businesses in this sector take advantage of this important aspect of business management.


The B2B software market is growing

Business to business (B2B) software is in high demand as companies are finding new ways to streamline their operations and grow. According to research from the Business-to-Business Market Research Bureau, the B2B software market grew by 8% in 2016 alone, making it worth an estimated $108 billion. As these industries grow, so does their need for inventory management. A lot of businesses assume that because they’re a software company they don’t have inventory, but we found out that they do!


The average software sale was $77,000 in 2017

Software companies are constantly working on developing new software for their customers and, in 2017, the average software sale was $77,000 according to National Association of Software and Services Companies (NASSCOM). This is an increase from the year before when it was $70,000. 

This means that these companies are constantly creating new updates or adding new features to products they already sell and should have some form of inventory to be able to do this on demand. However, we found out that there is no legal requirement for a company to hold any physical inventory at all. According to NASCOSM's industry report in 2013: The Indian IT-BPO industry employs 2.3 million people, with a growth rate of 10% per annum. They also said Indian IT-BPO exports reached $30 billion with 25% growth rate per annum.


Is there inventory in software sales?

Software companies need to have inventory in order to fulfill their customers' orders, but the amount of inventory they need is minimal because software is not a physical product. Most vendors use the just-in-time (JIT) model, which means they only produce and ship what their customers order at the time it is ordered. So, for example, if Company X sells 100 copies of Product A on January 2nd and then no more for the rest of the month, there will be no inventory left on January 31st. In fact, depending on how Company X tracks its inventory or calculates its cost of goods sold (COGS), there may be little or no value remaining as COGS by January 31st.


What can we find out about the characteristics of inventory in software sales?

Software companies do not have inventory, but they do have an ongoing relationship with their clients which sometimes requires providing the client with updates and upgrades to the software program that was sold. In addition, some software companies may rely on outsourced labor for certain aspects of their business, such as customer support or administration. Finally, it is important to note that many software companies are able to offer a free trial version of their product before purchasing it, so customers can be sure that the product meets their needs before making a purchase commitment. For example, Adobe offers a 30-day free trial version of its Creative Cloud suite. However, Adobe does not provide any in-person support for its products during this period. The only way to get technical assistance is through email or chat.


How to Get Started with Your Own Analysis

The first step in answering this question is to ask the question do software companies have inventory? A company needs an inventory system to keep track of the physical assets it owns, such as its materials and tools. When you install a piece of computer software on your computer, that doesn't count as an item in the inventory system because it isn't a physical asset. However, if you download a piece of software from iTunes onto your iPad, for example, that would be counted as an inventory item in your company's accounting system because you're able to purchase it electronically and store it on your device.


Conclusion

Software companies have inventory, but it is not physical in nature and cannot be seen or touched. The inventory of a software company is intangible, meaning that the value of this inventory can change at any moment, usually without notice. Given the high volatility in a software company's inventory, it is important to keep track of your asset and liability positions in order to maintain an accurate balance sheet. For more information on how the three types of assets are reported on a balance sheet, check out our previous blog post What Are Assets and Liabilities?.