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.
Learn more: What Is Buffer Inventory & How It Affects Your Business
Why is it Important to Track it Accurately
Ideally, the beginning inventory should be as accurate as possible, but in reality, it can often be difficult to track down all of the necessary information. There are a few ways to make sure that the beginning inventory is as accurate as possible:
- Compare physical counts of inventory against book values
- Review sales orders and receipts to make sure that everything has been accounted for
- Make sure that you have a good system in place for tracking incoming and outgoing shipments
- Make sure that your book values are up-to-date and accurate
- Talk to vendors to make sure that there is nothing else in transit or on the way that might throw off the calculations.
Benefits of Accurate Beginning Inventory Tracking
Accurate beginning inventory tracking is essential for any company that wants to ensure its financial reporting is accurate. There are several benefits to keeping a close eye on your beginning inventory:
- Being able to accurately predict cash flow needs and revenue projections: Accurate information about beginning inventory turns can help companies accurately predict cash flow needs and revenue projections.
- Being able to identify areas of the operation that need improvement: Accurate inventory tracking can also help companies identify areas of their operations that could use some improvement in terms of efficiency or organization.
- Identifying inventory problems before they become major issues: Finally, an accurate count of beginning inventory helps a company spot any potential problems with their operations before they become major issues. This allows them to take corrective action and address any underlying issues more quickly.
Overall, an accurate understanding of beginning inventory is essential for successful financial reporting and business operations. Companies should invest time into making sure their records are as up-to-date and accurate as possible. This will help them better understand their operations and make more informed decisions in the future.
You should also make sure to conduct periodic inventory checks throughout the year as well, especially if you are dealing with perishable goods or products that can easily change in value over time. Doing this will help to ensure that your records stay accurate and up-to-date, giving you a better understanding of how your business is performing overall.
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.
Related: How to Forecast Inventory?
Tips for Staying Organized and Ensuring an Accurate Calculation
In addition to performing physical counts and reviewing sales orders, there are a few other tips that can help companies accurately calculate their beginning inventory:
- Keep records up-to-date: Make sure you have a system in place to enter new inventory as it arrives and remove items from the books when they are sold or returned. This will ensure your records match up with reality.
- Track changes over time: Keeping track of changes in inventory levels over time can help you identify trends in supply and demand. It can also alert you to problem areas before they become too severe.
- Invest in tracking software: If your business is dealing with large volumes of inventory, investing in an automated tracking system can make life much easier for you and your accounting staff.
Overall, having an accurate calculation of beginning inventory is essential to the success of any business. Investing time into making sure your records are up-to-date and accurate can help you better understand how your business is performing overall. It will also give you peace of mind knowing that your financial reporting is as accurate as possible.
Related: eCommerce Inventory Management Tips & Tricks
Examples of How to Apply these Concepts in the Real World
There are numerous applications for tracking beginning inventory in the real world. Here are a few examples to help illustrate how this concept can be used:
- A restaurant owner might track the number of ingredients they keep on hand at the beginning of each day. This will help them determine their needs for ordering supplies and ensure that they always have enough ingredients to meet demand.
- A retail store might use beginning inventory tracking to accurately predict sales and plan promotions accordingly. By knowing exactly what items are in stock, they can adjust prices or offer discounts on certain products as needed.
- An online business might use beginning inventory tracking to forecast when they need to restock an item or remove it from their website altogether if it is no longer selling.
- A manufacturing company might use beginning inventory tracking to determine when to adjust production levels based on customer demand. This can help them save costs and ensure they always have enough products available for customers.
Related: Popular Amazon Inventory Management Tools You Can Use For eCommerce Business
Now that you understand how to calculate your beginning inventory, it's time to put this knowledge into practice. Remember these tips when you're getting ready to order your next shipment of products: 1) Make sure to include the cost of shipping in your calculations; 2) Compare prices between different suppliers; and 3) Factor in any discounts you may be eligible for. If you need help reducing shipping costs for eCommerce orders, get in touch with Simpl. We can help you find the best rates and save you money on every purchase.
Next article: How to Calculate Inventory Turnover