When you have an eCommerce business, your accounting team needs to be able to account for all inventory at all times. You should calculate ending inventory for several reasons, and doing it correctly can make the difference between showing profits or losses. In this article, we’ll discuss the reasons to conduct this step in your business, what formula to use, and how you can enlist the assistance of a 3PL partner to assist with your inventory management needs.
Why Calculate Ending Inventory?
As mentioned, there are several different reasons you may need to count your ending inventory numbers or costs.
- Match inventory records with the actual product
- Calculate net income and profits
- Ensure future accuracy of inventory recording
- At the close of business or when changing over to a new inventory method
Ending inventory is often conducted at the end of certain financial periods, such as the fiscal year or quarter. It may also be necessary to perform counts to check for missing inventory or ensure that profit margins are on point. Some other reasons to count the ending inventory include:
Regardless of the reasons, doing the inventory correctly is what counts. Up next, we’ll look at the formula for calculating it.
Ending Inventory Formula
Ending inventory = Beginning Inventory + Net Purchases – Cost of Goods
In the equation above, it’s pretty simple to calculate what your ending inventory will be. This isn’t just physical counts, either—you’ll want to count the product value as well to help determine inventory costs, profits, and other financial aspects. Start by determining what your beginning inventory was. Then, add in the purchases and subtract the cost of goods sold, and you’ll have your ending inventory.
Let’s break it down a little further to make it easier to understand.
Beginning Inventory
You can find inventory calculators online to help you determine your beginning inventory and other levels. To do the calculations yourself, however, it’s a fairly simple process. Start by figuring out what the cost of goods sold (COGS) is, based on your previous records. For example, if you spend $2 each on production and you sold 400 items, your total cost of goods sold would be $800.
Then, determine your ending inventory balance and the amount of inventory that was produced or purchased during the period. Let’s say, for example, that you had 500 items in stock and then produced another 600. That’s an ending inventory of $1000 and a new inventory of $1200.
The ending inventory ($1200) should be added to your COGS ($800). Then, subtract the new inventory ($1000) from that $2000, and you’ll have your beginning inventory which is a value of $1000.
Net Purchases
Net purchases refer to all purchases, including discounts, allowances, and returns. You will take the dollar amount of all purchases and then subtract any returns, allowances, or other discounts. This will give you the net amount of the purchases that were made, which is an important factor in the formula for determining your ending inventory.
Cost of Goods Sold
The cost of goods sold is simply how much it costs you to produce an item. In the example above, the cost of goods for the ending inventory was $800, while the cost of goods for the new inventory was $1200, with a cost of $2 per item to make.
You have to know the cost of goods so that you can factor it into the inventory formula to determine how much profit you’ve actually made after your expenses.
Ending Inventory Methods
Of course, there are also different methods for managing and calculating your inventory levels. Each has its own pros and cons to consider, and we’ll discuss them a little more below.
FIFO (First In, First Out)
This method assumes that you’re selling the items that you’ve had in your inventory the longest, first. For example, if you have five of an item that you got for $20, and then you have another ten that came in at $22 each, you’d sell the ones you paid $20 for first. This can help produce a higher ending inventory value, so it is sometimes used during periods of inflation or higher pricing.
LIFO (Last In, First Out)
Last in, first out assumes that you’re selling your newly acquired inventory first. With this method, you’d sell the $22 items before the $20 items of the same SKU or item number, based on the example given above.
This method may work better during a time when prices are decreasing, or they need to offset some of the cost of goods when profits are better.
Weighted Average
Weighted average inventory calculations are based on dividing what you spent on the inventory in total by the amount that you actually have. For example, if you started with a total of 100 items that were valued at $2 each and then purchased 200 more items valued at $3 each, you’d have a total of 300 items with an average value of $2.50, or a total value of $750.
How 3PL Helps Inventory Management
Is your head spinning yet? We’ve tried to simplify it the best that we can, but tracking and managing inventory is just plain complicated sometimes. It can be frustrating to keep track of things, and making sure you’re calculating the right numbers can be overwhelming. You’re not an accountant, nor should you have to be.
Not only that, but you’re trying to run a business. You’ve got better things to do than spend hours counting and calculating, and especially when there are tools and technology that can make it all easier and take the work off of your hands.
The solution? Partner with a 3PL provider that can assist with all of your inventory management needs. You’ll enjoy benefits like:
- Accurate inventory tracking
- On-demand production
- Warehousing
- Never a surplus of inventory
- Full inventory lifecycle management
- Shipping and return
When you choose Print Bind Ship as your 3PL partner, you’ll never have to stress over inventory again. We have the technology, tools, and solutions to take care of all of your inventory needs, from warehousing and receiving to shipping, returns, and even the balancing and counting of inventory. Contact us now to learn more and get started.