Whether you manage products in a warehouse or handle fulfillment to multiple locations, your beginning inventory lays the foundation for accurate financial tracking and inventory control. Only by fully understanding this value can you run a smooth and cost-efficient business. Below, we’ll share exactly what beginning inventory is, how to calculate it, and why it’s important to your business.
What is Beginning Inventory?
Your beginning inventory is the total value of goods a business has available for sale at the start of an accounting period. This value is your inventory left over from the previous period that you’ll use in the current one.
For example, if your company ended last year with $50,000 worth of unsold products, that same $50,000 is your beginning inventory for the new year.
Beginning inventory is critical to tracking business performance, helping you determine three key aspects of your business:
- How much new stock you need to purchase.
- How effectively you’ve managed your supply.
- How much profit you’ve earned after sales.
The Full Impact of Beginning Inventory
Knowing your beginning inventory helps your business stay organized and efficient. Here’s how:
- Improved Forecasting: By reviewing what you start with, you can more accurately predict what you’ll need for the next period.
- Accurate Cost Tracking: Your beginning inventory helps you calculate your cost of goods sold (COGS) and determine your true profit margins.
- Better Inventory Control: Determining what you already have prevents over-ordering of certain products.
- Informed Business Decisions: You can make smarter purchasing and pricing choices by tracking inventory trends, including leftover inventories.
Accurate beginning inventory data lets you identify slow-moving products and improve purchasing habits, supporting your business’s long-term growth.
How Do I Calculate Beginning Inventory?
You can easily calculate your beginning inventory with this formula:
Beginning Inventory = (Cost of Goods Sold (COGS) + Ending Inventory) – Cost of Purchases
Understanding each part of this equation helps you see how inventory flows through your business:
- Cost of Goods Sold (COGS): The total cost of the products you sold during the period.
- Ending Inventory: The value of unsold goods remaining at the end of the period.
- Cost of Purchases: The total spent on new inventory during that same period.
For example, if your company’s records show:
- COGS = $30,000
- Ending Inventory = $40,000
- Purchases = $25,000
Your beginning inventory is calculated as follows:
Beginning Inventory = (30,000 + 40,000) – 25,000 = $45,000
How to Value Inventory
Once you’ve determined your beginning inventory, you next have to value it. The value you assign to your inventory can affect profit margins, taxes, and long-term financial planning.
Here are the most common methods used to value inventory:
First In, First Out (FIFO)
The FIFO method assumes that the first items you purchased are the first ones sold. This method works best for businesses whose inventory moves quickly, or where older stock must be used first, such as in food or manufacturing. It offers a more accurate reflection of real-time costs when prices rise, but it can increase taxable income during inflation.
Last In, First Out (LIFO)
The LIFO method, opposite of FIFO, assumes the newest inventory is sold first. Though less common, it can be used to offset rising costs by lowering taxable income when prices increase. However, it may not accurately reflect the flow of goods.
Weighted Average Cost
The weighted average cost method calculates an average cost for all inventory items by dividing the total cost of goods by the number of units available. This smooths out price fluctuations and simplifies accounting, but it can be less precise for businesses with large variations in product costs.
Specific Identification
This method is used for unique or high-value products, such as vehicles or luxury goods, to track each item individually. It offers a precise valuation for these specialized items, but it requires more detailed tracking, which can be time-consuming.
Common Challenges With Managing Beginning Inventory
Even with a simple formula, tracking accurate beginning inventory can be challenging. Here are some of the top challenges businesses may face with this process:
- Manual Tracking Errors: Using too many spreadsheets or paper records can often lead to mistakes from human error in tracking.
- Disorganized Storage: Without a clear warehouse structure, inventory counts can quickly fall out of sync.
- Lack of Real-Time Visibility: When stock data isn’t updated regularly, you run the risk of overordering or running out of essential products.
How ExpressTrac Can Help With Inventory Management
Managing your inventory doesn’t have to be complicated. ExpressTrac’s fulfillment and logistics solutions help businesses of all sizes handle inventory smarter, faster, and more accurately. We can help with:
- End-to-End Visibility: You can track your products in real time across all storage and shipping locations.
- Streamlined Fulfillment: ExpressTrac simplifies the process of moving materials from your warehouse to your customer’s customer.
- Accurate Data and Reporting: Our systems easily integrate with your inventory records, so you get reliable insights to improve your business decisions.
With ExpressTrac, you get the advantage of precision logistics built for efficiency, so you can accurately track your data. Whether you’re restocking multiple sites or shipping nationwide, we make it easier for you to move goods without losing track, so your business can keep moving forward. Contact us to partner with ExpressTrac today and learn more about how we can help you track, move, and manage your inventory with greater control.