When it comes to running your own business, whether a small operation or a massive company, there's little more important than inventory management. After all, if you're producing a product, you kind of need to know how much you're buying, selling, the cost of production, etcetera. And at the center of all of it is beginning inventory, since this is used to help calculate many other figures you'll want to understand. How do you calculate this? Read along to find out.
WHAT IS BEGINNING INVENTORY?
Sometimes called opening stock, the beginning inventory is pretty close to what you'd expect from the name. It is essentially the recorded cost of inventory at the start of a company's accounting period. Classified as a current asset, it technically doesn't appear on a balance sheet. However, beginning inventory is the same thing as ending inventory from the accounting period immediately before it. It also technically gets logged on this sheet – just under a different period and title. All that said, what exactly is the use of beginning inventory?
Well, it's mainly there to serve as a kind of "starting off" point for figuring out the cost of goods sold. It is also often used to calculate average inventory in a given period, helping you understand how much inventory you'll probably have at specific points in the year. In laymen's terms? Beginning inventory is essential to proper business accounting and general financial analysis, shaping how you run your business.
HOW TO CALCULATE BEGINNING INVENTORY
Unfortunately, as is the tendency for pretty much anything critical in accounting or business management, there's a little bit of math needed to get an accurate measure of your beginning inventory. However, the good news is that it's nothing too overly complicated, even if you find yourself repelled by numbers as a cat is by water. It's pretty simple stuff. All you have to do is get out your financial records and do a couple of quick calculations.
Start by determining the cost of goods sold (COGS) with your previous accounting period's records.
For example, let's say you run a company that makes t-shirts and that each of these is produced for just $2. If you sell 1000 of these in a year-long period, your COGS will be $2000 because you multiple these two figures.
Calculate your ending inventory balance with the same records and the cost of goods purchased during the particular accounting period.
Using the same company example as before, if you've got 400 shirts in stock at the end of the period and produce an additional 1500 next year, these are the figures you'll come up with. Ending inventory balance: $800 New inventory balance: $3000
Add the two numbers you calculated in the previous step.
For our purposes, this will be $3800.
Subtract the number of purchases made in the accounting period from your last figure to get your beginning inventory.
Example: $3800 - $3000 = $800
After you've followed these four simple steps, you're done! You can now use this number to help your business in various ways, determining if you've sold a fair amount compared to what you've bought, how much dead inventory you might have, and get a better idea of operational or sales trends. These can go on to shape how you run your business in the future, changing up how much you buy, finding supply chain problems before they become too much of an issue, and more.
Next article: How to Calculate Inventory Turnover