Beginning Inventory (Opening Stock)
Every company whose business involves the management of stock should be familiar with inventory-related terminology. Some of the many terms include: active stock, aisle, ATA, ATD, backorder, barcode, SKU, blind receiving, 3PL, 4PL, buffer stock, ending inventory, cargo, cross-aisle, consolidation, cross docking, cycle count, DDP, DSD, EAN, FIFO, LIFO, fixed slot, and more. Beginning inventory is arguably one of the most important of these concepts.
- The concept of beginning inventory
- Calculating your beginning inventory
- Using beginning inventory in your operations
- Managing inventory across multiple warehouses
What is Beginning Inventory?
The beginning inventory calculation is vital for those companies with warehouses of any size. Starting a new month with more inventory in hand than the month prior? This might be the best course of action if you’re preparing for a big sales campaign or the mad rush of Black Friday, Cyber Monday, and the whole holiday season. Starting the month with less stock than when you started? This is good news if special promotions are over or you expect demand to decrease. However, without accurate beginning inventory calculations, you’ll be managing warehouse inventory levels by feelings instead of by fact.
The term “beginning inventory” is simply the number of products in stock at the start of an accounting period. Different businesses will, of course, count inventory in different ways. If you’re stocking items such as shoes or shovels, you probably count in simple units. If you’re dealing in raw materials such as gravel, bark dust, and the like, you’ll count in unit quantities such as weight or volume. Or you might be dealing with more complex inventory such as both assembled computers and their component parts. Whatever the case, it’s important to count the same item types the same way every time you take inventory. The next step is to put those accurate counts to use in making smart business decisions that ensure smooth ordering and fulfillment operations. This is where the beginning inventory calculation comes into play.
How to Calculate Beginning Inventory
You have the figures of ending inventory and cost of goods sold (COGS) from the previous period. With those in hand, you can start to calculate beginning inventory for the start of a new accounting period. The formula is as follows:
Beginning Inventory Formula = (COGS + Ending Inventory) – Inventory Purchases
Let’s explain it with a simple example:
Say that you are a white goods seller and you sold 1000 washing machines during the last accounting period, each costing $200 to manufacture. The cost of goods sold is calculated by multiplying the manufacturing price by the quantity:
COGS = Manufacturing Price x Quantity
$200 x 1000 = $200,000
Assume that you have 250 washing machines left at the end of the period. You’ll also need to know the ending inventory value for the period, which is simply calculated by multiplying the manufacturing price by the remaining quantity of products:
Ending Inventory = Manufacturing Price x Remaining Quantity
$200 x 250 = $50,000
The last element in the beginning inventory formula is the value of purchases made during the accounting period. To calculate it, all you need to have is manufacturing price and inventory quantity purchased. Assume you purchased 200 washing machines during the period:
Inventory Purchases = Manufacturing Price x Quantity
$200 x 200 = $40,000
With all these figures in hand, you simply plug them into the beginning inventory formula:
Beginning Inventory = (COGS + Ending Inventory) – Purchases
($200,000 + $50,000) – $40,000 = $210,000
According to all these calculations, your beginning inventory is worth $210,000 at the start of the new accounting period. Calculating beginning inventory is just that easy. Now it’s just a matter of using that information to optimize your stock operations!
Transform your warehouse to a DTC fulfillment center
Where to Use Beginning Inventory
Now that you know how to find beginning inventory for your own business, it is time to put it to use. You should have your beginning inventory values calculated for all different stocked items at the start of each accounting period. Not only does having this information help you optimize warehouse operations, it helps you manage cash flow, can assist you when qualifying for any bank loans and will even inspire confidence with investors and partners. Since inventory is generally the biggest asset that e-commerce companies have, it is vital to know what you should have in hand from the start of a new period – for both your operations and your company’s financial health.
Beginning inventory is necessary for internal accounting documentation. This figure may help you with e-commerce bookkeeping in many ways, such as spotting possible discrepancies, guessing future production, and tracking inventory write-offs due to any theft, loss, or decline in demand. When you can rely on your inventory figures at the beginning of every period, it is easier to deal with the inevitable fluctuations in market conditions.
As mentioned, knowing your beginning inventory also helps you manage cash flow and even impacts the tax deductions you can realize. For example, carrying too much inventory will reduce your tax benefit since deductions are calculated after the goods are sold, deemed worthless, or disposed of. And of course keeping excess stock on hand adds to both warehousing costs and potential financial risk.
You may also like: Want to learn how to calculate inventory turnover ratio? Check out the inventory turnover ratio calculator and improve your turnover ratios over time.
Beginning Inventory with Multiple Warehouses
Many large companies deal with high-volume shipping operations every day where stock is divided up and warehoused at different centers in different locations. This of course helps improve delivery times and decreases shipping costs. To help manage these complex operations, large companies generally prefer to use optimized shipping processes. When companies deploy a cloud-based ordering, fulfillment and shipping software system across their distribution network, they can simply login from anywhere they are and have access to real-time inventory counts. Without minimal effort, they can calculate ending and beginning inventories, automate the labeling process, integrate digital scales, different group shipping options, and enjoy many more time, money, and labor saving benefits.
At first glance, calculating beginning inventory values seems fairly simple. And it is! However that does not mean it is not vital to all ordering and fulfillment operations. The real value comes from using these values to make smart business decisions.
Inventory levels will nearly always fluctuate, and that can be a good or bad sign for your business. A decrease in beginning inventory values could indicate particularly strong sales during a period, or a critical problem in the overall supply chain. Conversely, raising values in beginning inventory could be the result of intentional preparation for increased product demand, or a drop of in market demand for certain inventory items. Knowing which of these scenarios is the case is vital for the success of any B2C or DTC operation, and it all begins with knowing your beginning inventory.
Beginning Inventory FAQs
What is beginning inventory?
Beginning inventory is the book value of a company’s inventory at the start of an accounting period.
How do you calculate beginning inventory?
The beginning inventory formula is (COGS + Ending Inventory) – Purchases
What is the difference between ending and beginning inventories?
Ending inventory is the value calculated by summing up your beginning inventory and net purchases and extracting it from your cost of goods sold. On the other hand, beginning inventory is calculated by adding the COGS to ending inventory and extracting the result from purchases.
Why is beginning inventory necessary?
Beginning inventory is necessary because it shows you how many products you have in your stock at the start of each period. This lets you better understand sales and operational trends for a certain business and make improvements accordingly.