Inventory control is one of the most important aspects of running a successful warehouse in an eCommerce business. Understanding some of the basic principles in inventory management is vital to operating as efficiently as possible. In this article, we’ll focus on one of those basics:. Ending inventory.
What is ending inventory?
Ending inventory, also called closing inventory, is the total value of goods that a company has in stock at the end of a given accounting period. Businesses typically calculate their ending inventory at the end of each fiscal quarter.
Why do you need to calculate ending inventory?
The primary motivation for calculating ending inventory is to find their cost of goods sold, or COGS. This can be calculated using the following formula: COGS = the starting inventory + purchases – ending inventory.
How to find ending inventory?
Most warehouse management software automatically keeps track of your inventory in real time. However, it may be beneficial to do a hand count of a variety of inventory items every quarter. This helps ensure the real-time tracking is working.
Additionally, the start of a quarter is a great time to reassess your COGS and see what’s working well in your acquisition process, inventory management, and warehouse processes. This opportunity is a great way to realign with short and long-term goals (if you missed it, check out our article about creating an effective plan for navigating 2023).
If you haven’t put warehouse management software in place or if your existing software does not automatically calculate your ending inventory, keeping close accounting on physical ledgers is the second-best option. Of course, this will be much more time-consuming and require more hand checks of the inventory.
What’s FIFO and LIFO?
FIFO and LIFO are two strategies for using inventory that can affect how ending inventories are done. FIFO, or ‘first-in-first-out', dictates that the first inventory received will be the first inventory to be sold. For example, if stock is received on February 5th and 10th, the stock received on the 5th will be sold first. This strategy is more common than LIFO and is generally considered to simplify bookkeeping.
The other inventory strategy is LIFO, or ‘last-in-first-out'. This strategy allows businesses to use the most recent inventory cost first. Especially in times of high inflation, LIFO can be beneficial. This is because the method uses current prices to calculate the cost of goods sold instead of what you paid for the inventory already in stock. This strategy should only be used for non-perishable and non-seasonal goods.
Regardless of the method of inventory management a business uses, knowing what your ending inventory is and how to use it to find the COGS are crucial. The ShipCaddie TWMS platform is a one-stop shop for businesses' inventory management needs, including real-time inventory levels.
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