Inventory reserves are an important concept for businesses to understand. They refer to the portion of inventory that’s set aside for a specific purpose, such as insurance, warranty claims, or debt settlement. When companies take inventory reserves, they assume that there is some risk associated with the product and don’t want to accept the full liability. The amount of the reserve is determined by the company’s best estimate of what it will cost – in terms of money and resources – to cover this liability. In some cases, these reserves may be used to cover unexpected losses or costs due to damage or defect. Taking inventory reserves enables businesses to plan ahead and manage their risks so they can continue to operate smoothly.