Definition:

Inventory includes the value of products ready to be sold in the market, and the raw material needed to make new additional products.

Example:

Your gadget company made 100 gadgets, 50 of which have not been sold. These 50 gadgets, along with any remaining parts and raw material you own is called inventory.

Why it matters:

If sales are unpredictable or seasonal, then it makes sense to hold more inventory to cover the potential spikes in demand. But inventory ties up cash and incurs storage costs, so setting the right balance between these costs and the probability of higher sales is important.