Inventory is one of the most important units in your business. It is the unit of your business that your customers actually want. So, unless you are paying attention towards its management, chances are you’re damaging your business. Inventory is what helps you take off with your business and reach out to the customers. However, as important as it is to take a note of the quality of the inventory, it is equally important to calculate it. But don’t worry if you don’t know how to calculate your inventory. We’ll help you get started!
How to calculate your inventory remains one of the most asked questions among sellers. And that is because there is a lot of confusion in inventory. Whether to calculate beginning inventory or ending inventory remains a question. Similarly, calculating inventory has several formulas in which sellers often get confused.
Inventory creates most problems in a business because there’s too much for a seller to handle. If you’re just selling from your home, you might have already been tied up in several activities of the business. These may include designing marketing campaigns, receiving orders, dispatching inventory and more. In this aspect, the inventory might get neglected. Therefore, knowing how to calculate your inventory becomes important.
Alternatively, just because you are not a big seller and selling from home, doesn’t mean that you don’t have to pay attention to your inventory. Remember that inventory management is a practice that needs to be adopted right from the beginning. As a business you have to take account of your inventory no matter how little it is.
And that’s because it is important for your finances and as well as for determining your gross profits. If you don’t know how to calculate your inventory, you will not be able to make other calculations. Similarly, you will not be able to calculate your business profits if you don’t calculate your inventory adequately.
Know What is Inventory Before You Learn How to Calculate Your Inventory
Inventory refers to the physical units in your storage that you are selling to your customers. In simple words, it is what sells in the market.
In case you are a manufacturer inventory for you will mean the raw products and items that will be used in your production. Similarly, if you are a seller, inventory will mean finished goods such as apparels, books, jewellery etc.
The inventory is usually held by a business to make sales. Most sellers have their warehouses where they store their inventory. If you are selling software or a service you need not worry about this. Because you don’t have to deal with physical inventory. Similarly, businesses that have physical products have to deal with inventory.
Before you know how to calculate your inventory, it is imperative to understand inventory. Because this is what you will be calculating for all your business correspondences.
However, if you are a dropshipper, your inventory might sit with your supplier. In this case, you are not directly holding your inventory. But, that doesn’t mean you’re entirely free from the responsibility of how to calculate your inventory. Dropshipping does involve less details of inventory because you don’t have to deal with them physically. But, nonetheless, it is something you have to have to pay attention towards.
Now that you’re aware of your inventory, let’s move on. In the next section we will try to understand why calculating inventory is important. And then we’ll finally proceed to how to calculate your inventory.
Why Calculate Your Inventory?
Calculating inventory is important for various reasons. First, it throws light on several factors of your business. It gives you accurate estimates of several parameters. Let’s look at some of the main reasons why calculating your inventory is useful.
Get an Idea of Your Beginning Stock
If you don’t know how to calculate your inventory, how will you figure out your beginning stock. It is important to know how much stock you’re beginning your business with. Especially for a financial year, you need to know your accurate stocks. Your beginning inventory tells you about your inventory generating potential. Therefore, there is no way that you want to miss out on calculating it.
Figure Out Your Ending Stock
Just like the beginning inventory, it is important to know how to calculate your inventory that is ending. In other words, at the end of a financial year it is quite likely that you have some remaining inventory with you. This tells you about the value of goods and services towards the end of the accounting period. If you don’t know about your ending inventory, you will not be able to find out your net profits accurately.
How do you plan to keep a note of your profits, if you don’t know how to calculate your inventory. Remember that calculating inventory is one of the most important steps one has to take in order to track their profits and losses. If you don’t know how to calculate your inventory, you will end up losing a lot of your money, even without realizing.
Know Your Preparedness
When you know how to calculate your inventory, you understand how prepared your business is. In other words, you get an estimate of your actual inventory. So, if you are running low on a particular stock, you can purchase more of its units. In other words by knowing how to calculate your inventory, you are preparing your business.
How to Calculate Your Inventory?
Let’s finally get down to the knitty gritty of your inventory. In other words, let’s learn the formula used for calculating inventory. There are different types of inventory ratios and formulas you must know. So, read on to find out how to calculate your inventory accurately-
Calculating Your Beginning Inventory
Beginning inventory gives you an estimate of the profit making potential of your business. Like we talked about in the earlier section, it is important that you learn to calculate it. To calculate your beginning inventory-
- Find out the cost of goods that you have sold in the past year. You can use your previous accounting records for this purpose.
- Multiply the ending inventory balance with the production cost of all the items you have. Similarly, repeat this procedure with your new inventory.
- To this product, add your ending inventory. You must also add the cost of the goods sold at this stage.
- Next, calculate your beginning inventory by subtracting the amount of inventory purchased. This gives you your final result.
Calculating Your Ending Inventory
We talked about your beginning inventory. Now comes the time to help you learn how to calculate your inventory that is ending. The knowledge of ending inventory is crucial for your business. Here’ s how you can calculate it-
- Start by adding the cost of the beginning inventory to the cost of your total purchase for a particular period. This gives you the cost of goods that are available for sale.
- Next, multiply the gross profit percentage with the sales amount. This will help you find the estimates of the cost of the goods you have sold.
- Now you have to subtract the cost of goods available for the sales form the actual costs of the goods that have been sold. This will give you your ending inventory.
Inventory Turnover Ratio
When understanding how to calculate your inventory, you also need to dive down into the inventory turnover ratio. It is also called the stock turn and signifies how often you sell and replace a product. The inventory turnover ratio can be anything depending upon the nature of the goods you’re selling. To calculate your inventory turnover ratio use the formula below-
- Find out the cost of goods sold during a particular period
- Divide this by the average inventory. This will give you your inventory turnover ratio.
In case you are stuck with the first step, where you have to calculate the cost of goods sold, you can use this formula-
- Add your beginning inventory to your purchase during the year. Now subtract your ending inventory from this sum.
Learning how to calculate your inventory can be tiresome. But one of the easiest formulas that you will come across is the average inventory. The average inventory is calculated by using the following formula-
- Add the ending inventory balance to the beginning inventory balance
- Divide this by 2 in case you are calculating average inventory by month. In case you are calculating for a season, divide by 7. Moreover, for an entire year you must divide by 13.
Calculating inventory can be one of the most challenging tasks for your business. However, once you learn how to calculate your inventory, you can do a lot of things. You can figure out the correct estimates for your business as well as understand your profits more closely. Remember that inventory costs rise because of shipping as well. So, make sure you partner with a reputed logistics platform like Dash101, that will help you ship your items at the lowest costs seamlessly.
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