How to Calculate Beginning Inventory

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. 

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The Importance of Tracking Beginning Inventory

Accurately tracking beginning inventory is a critical part of managing any business that deals with physical products. By understanding exactly what stock you have on hand at the start of an accounting period, you can ensure your financial reporting and projections are based on real data.

Why Track Beginning Inventory?

There are several key reasons to put effort into accurately tracking your beginning inventory:

• Predict cash flow needs and revenue - Knowing your current stock levels allows more accurate financial forecasting.
• Identify areas for improvement - Understanding what inventory you have can highlight inefficiencies in your operations.
• Catch issues early - An accurate inventory count makes it easier to spot problems with inventory or suppliers before they become severe.

How to Calculate Beginning Inventory

While a full physical inventory count is ideal, you can arrive at a good estimate of beginning inventory through some simple calculations:

1. Determine the cost of goods sold (COGS) from financial records for the previous period.
2. Calculate the ending inventory balance from the same records.
3. Add the ending inventory balance to the cost of new inventory purchased.
4. Subtract the amount of new purchases to find your beginning inventory.

Keeping organized records and having a system to track inventory movements makes these calculations simpler and more accurate.

Real-World Examples

Accurately tracking beginning inventory helps all types of businesses:

• A restaurant can ensure it has enough food to meet demand each day.
• A retailer can plan promotions and sales based on current stock levels.
• An online seller can forecast when items need to be reordered or removed from sale.
• A manufacturer can align production with customer orders.

By taking beginning inventory seriously, companies gain insights into their business and can make smarter decisions as a result.

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Next article: How to Calculate Inventory Turnover