How to Calculate Ending Inventory Like a Pro

As the end of the year approaches, it’s easy for retailers to get caught up in the holiday spirit, the last minute rush, returns, and exchanges, and planning next year’s product assortment strategy. But don’t forget about two of the most important tasks for transitioning into the new year: your year-end inventory count and calculating ending inventory.

Completing a physical inventory count is important for meeting customer expectations and determining your ending inventory value. Your ending inventory value is used for tax purposes and financial statements during the next accounting period.

Conducting a year-end inventory count and calculating ending inventory can put a lot of pressure on retailers. That’s why we compiled this guide to walk you through your end of year inventory tasks step by step.

What You'll Learn In This Blog

What Is The Difference Between A Cycle Count And A Year-End Physical Inventory Count?

Cycle count

Cycle counts ensure your records match the actual inventory on your shelves and warehouse by counting your stock in bite sized pieces.

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Learn more about cycle counts and why your business needs them with our comprehensive guide.

Year-End Physical Inventory Count

A year-end inventory count essentially follows the same steps as a cycle count. However, your team should be conducting cycle counts regularly throughout the year, whereas your physical count is completed all at once at the end of the year.

Why Are Full Physical Inventory Counts Done At The End Of The Year?

Making sure your inventory records match what sellable inventory is available to customers will keep your business running smoothly into the new year. Not only will it minimize challenges during holiday returns and exchanges, it means never sending a customer to a competitor because your stock counts aren’t accurate.

Benefits Of A Year-End Inventory Count

  • Ensure your recorded inventory levels match the goods available for sale

  • Make note of successful A/B test strategies to apply them to slow moving products next year

  • Hold staff accountable for any discrepancies as a result of employee theft

  • Identify dead inventory and consider removing them from your next purchase order to make room for more profitable products

  • Notice any popular products with low stock counts and adjust PAR levels so you never run out of inventory

  • Grow your business with decisions based on data instead of guesswork

  • Gain insight on where there is room for improvements in your pricing strategy or product assortment mix

  • Take note of trends that cause incorrect stock counts, like receiving errors, and update operational practices

Reasons For Inaccurate Stock Counts

There are many reasons your records might not match the physical product you have available to customers. Clear processes and an inventory management software can help mitigate these errors but it’s likely throughout the year your business has run experienced these.

While you complete your physical inventory count, identify the reason for inaccurate counts and take good notes so you can tighten up your operations next year.

  1. Products are in the wrong location

  2. Products have unclear, misprinted, or repeated labels

  3. Human error

  4. Software error

  5. Inefficient workflows or operations

  6. Insufficient product storage

What You Need To Complete A Year-End Inventory Count

Inventory Management Software

While you can use a spreadsheet to manually complete your end of year physical inventory count, you are more prone to mistakes. Investing in an inventory management software app will not only eliminate human error, but will automate the process.

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Thrive users can create a Stocktake report, complete the count, and make any notes about reasons for errors all in one place. By automatically tracking inventory counts, Thrive will sync out any stock updates to all your in-store locations and/or online store at once.

Trained And Trustworthy Staff

For most businesses, conducting physical inventory count involves the whole team. Not only does it require counting every single product in your store, it also means the count must be done outside of business hours to eliminate real-time inventory purchases.

Make sure you have a training session prior to the count to go over the procedures, divvy up responsibilities, and answer any questions. That way your team can be as efficient as possible. Check out our year-end inventory playlist on Shopify for songs your team can’t help but sing along to, to help pass the time!

Thrive has an added level of security with user permissions by requiring a manager’s approval, so you can review discrepancies and confirm adjustments before submitting a count.

Barcode Scanners

Though not required, if your inventory management system is compatible with barcode scanners you can save hours of time during your count. Barcode scanners automatically count your stock levels and increase accuracy compared to pen and paper counts.

4 Steps For Your Physical Count

  1. Create an inventory count report using a spreadsheet or your inventory management system

  2. Complete your count

  3. Make detailed notes of an inventory errors

  4. Update your recorded inventory across all your sales channels

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What Is Ending Inventory?

Once you have completed your year-end physical count you’re able to calculate the ending inventory value. The ending inventory formula is the total value of your remaining inventory.

You should calculate ending inventory to align with your accounting period. That means most retailers complete their count at the end of the year or first thing after the new year.

By calculating ending inventory immediately after your physical inventory count you are ensuring your numbers are accurate, saving you extra work come next accounting period.

Why Do I Need To Calculate Ending Inventory?

During each accounting period, retailers must complete a balance sheet which impacts your taxes. Your balance sheet includes your beginning inventory, net purchases, and the cost of goods sold. In order to have an accurate balance sheet, you must claim your inventory balance as an asset.

Benefits Of Calculating Ending Inventory

  • Maintain clean inventory records for next accounting period

  • Clearly see your profitability and demand volume to make key business decisions, like opening a second location

  • Know the cost of goods sold and your total net income

  • Gain insight into stock forecasting for the upcoming year

How To Calculate Ending Inventory

The ending inventory formula goes as followed: Beginning inventory + net purchases – cost of goods sold = ending inventory balance

Here are each of the components in the formula:

  1. Beginning inventory: The monetary value of all the products you had available to customers at the start of the year. This means your ending inventory value this year will serve as your beginning inventory value the following year.

  2. Net purchases: The value of any items purchased throughout the year.

  3. Cost of goods sold (COGS): The total value of products sold at your business throughout the year.

If you use an inventory management system, pulling numbers for your ending inventory formula should be as simple as looking to your year-end inventory count. Otherwise, you will need to pull your records from the past year and manually determine values for each of the formula components before calculating ending inventory.

Inventory management reporting

Tips For Determining Ending Inventory

  • Complete cycle counts and keep your inventory records clean regularly throughout the year to streamline your end of year tasks.

  • Minimize any opportunity for stock changes while completing your year-end inventory count by closing out all shipping, receiving, and transactions.

  • Practice the first in, first out (FIFO method) so your total value is reflected in your recent inventory purchases.

  • Implement an inventory management system to automate and increase accuracy for end of the year procedures.

  • Make it fun for your staff! Order in food and listen to Thrive’s year-end inventory playlist on Spotify to keep you entertained all count long.

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