How to do a year-end inventory count
29. October 2021•8 minutes read
Whether you run a body shop, a retail store, or a law firm, a year-end inventory can help your business close the books for the past 12 months while getting organized for the year ahead. In this article, we'll explore the importance of a year-end inventory count and explain exactly how to calculate your year-end inventory.
We'll also help you understand the difference between a year-end inventory and a cycle count, what to do when you have more stuff than you can possibly count, and how the results of your annual exam can help you understand demand for ahead of the year to be forecast. We'll also cover how inventory apps can make your yearly counts so much easier.
What is a year-end inventory count?
An inventory at the end of the year reveals how muchavailable stock valueyour business at the end of the year at hand. It should be a comprehensive review and include all the different onestypes of inventory. A company typically needs to pause operations while conducting this annual review to ensure an accurate snapshot of available inventory.
By taking a close look at what's in your company's inventory, you can meet tax requirements and company audits, and provide accurate data to your accounting team. You also have the data you need to identify inventory depletion and forecast what inventory you may need in the coming year. And while you're at it, here's a chance to organize your inventory for the new year.
While most companies do this physical inventory at the end of the calendar year, mid-year is also a common choice — as long as it works for your accountant and corporate tax returns.
What is the difference between the year-end inventory and an inventory cycle count?
In order to check this, a physical end-of-year inventory is carried out annuallyatthe inventory you actually have on hand matches the numbers in your inventory control system. other hand ainventory cycle countingAuditsa small portionof the inventory, piece by piece.
Over time, cycle counts will check everything you have on hand, but it can take a full year to achieve this. An inventory cycle count will never give you an exhaustive, comprehensive, and verified list of everything you have on hand in real time.
A year-end inventory typically requires your business to shut down and focus on counting each individual item, while an inventory cycle count can easily be done during regular business hours.
Are you ready to change the way you inventory your company?
Start a free trial
Methods for conducting a year-end inventory
There are three notable ways to do a year-end inventory count. These are the FIFO method, the LIFO method and the weighted average (or average cost) method.
Each method attempts to find a solution to the ending inventory, a popular inventory calculation. The formula is: Beginning Inventory Value + New Inventory Value – Cost of Goods Sold.
All three accounting methods provide different values for this equation - and lead to different results. Read on to find out which method works best for your business.
First-in-first-out (FIFO) procedure
This accounting method assumes that your company sells or consumes the inventory received first, well,First. That means t-shirts bought in 2020 would “sell” before the same t-shirts bought in 2021. In other words, your company's "remaining inventory" would include inventory that was last purchased.
The FIFO accounting method is ideal in times of high inflation. That's because that lower, older cost of goods sold can be applied to everything that's sold, resulting in higher net income -- and higher ending inventory value, too.
Last-in-first-out (LIFO) procedure
On the other hand, the LIFO accounting method asks a company to sell its recent purchases and acquisitions sooner. This means that the older, lower cost of older products is reported as "remaining stock".
Using LIFO will usually lower net income, but can be quite beneficial for tax returns when prices are rising.
average cost method
The average cost method, also known as the weighted average method, uses the weighted average of all inventory paid for within a given period to determine the cost of goods sold and the available inventory value.
The average cost method is the simplest and cheapest method of calculating year-end inventory. It is also much less prone to tampering. It's a popular method for businesses that move through tons of inventory and don't track many details about their inventory.
Your accountant can help you determine which year-end inventory accounting method is best for your business. learn more aboutinventory counting methods.
What if your business finds inventory declining?
Companies often uncover inventory shortages during the year-end inventory count. After all, only an actual, physical count of your inventory can tell if what you have on hand matches what you have on paper (or in a spreadsheet or inventory app).
What is inventory depletion?
Inventory shrinkage occurs when actual physical inventory is less than inventory records show. This can be due to human error, supplier shortages, damaged inventory, lost inventory, or stolen inventory.
Inventory depletion can drastically impact profits and is an issue that usually requires further investigation.
What to do in case of inventory dwindling?
If your company finds inventory depletion during an inventory count, your team will want to look for more information. If you use inventory management software or do inventory cycle counts, you may be able to look through past inventory records to determine when a shrinkage occurred.
Use your detective skills. Widespread, significant shrinkage may indicate fraud or theft. One-off mistakes tend to reveal spelling mistakes. And damaged goods is self-explanatory.
Once you've uncovered and investigated inventory losses, your business can put guard rails in place to prevent further profit losses. Common preventive measures include:
- Tighten security where your inventory is stored – maybe install cameras or lock up high-value items
- Train employees on how to properly balance inventory in cycle counts or in an inventory app
- Only designated, trained employees are allowed to accept and inspect the new inventory
- Always check invoices, purchase orders and packing slips when new inventory arrives
- Review daily transactions right in your inventory app, every day
- Check your inventory decline frequently against cycle counts to ensure the problem is getting better, not worse
Discovering inventory shrinkage isn't fun, but it's a wake-up call that many businesses need.
Or what if you have too much inventory?
Once you complete your year-end inventory, you may find that you have more physical inventory than expected. And if yesmuch moreStock than you want or need, you may need to come up with some ideas on how to deal with that excess stock.
First, determine what excess inventory can be used or sold next year. Then adjust your plans, budget, and orders for next year accordingly.
Once you've figured out what else your business needs for the year ahead, it's time to get creative. What items could be sold at a discount? What kind of sale or promotion could help you win back as much money as possible?
There may also be items in your inventory that could be reused in other ways or donated. If you're donating excess inventory, talk to your accountant about writing off those donations if possible.
Finally, you may want to speak to a liquidator about purchasing your excess inventory. No, it won't be profitable, but you can cut your losses, make room and move forward.
Use your year-end inventory count to predict next year's demand
One of the best reasons to conduct annual inventory counts is to better understand how your business has been using (or not using) specific items over the past 12 months. A detailed snapshot of your available inventory can help your businessforecast demandfor the next year.
Plus by checking whathas notsells, you can create a plan to drive demand with promotions, sales, and marketing campaigns. These strategies can help you move old available inventory so you can focus on replenishing only what you know your customers want next.
How inventory management software can help
Inventory management software enables businesses to track their inventory with modern technology and powerful automation capabilities. And inventory software not only helps streamline year-end inventory counts, but also inventory cycle counts and inventory transactions that happen every day.
When choosing inventory software, look for a product that offers key features that will save you time, money, and stress. Ideally, the product should be:
- Accessible anytime, anywhere - even nationwide
- Work like an app on phones, tablets and computers your company already owns
- Really easy to set up - no seminars or training manuals required
- Rich in detail and customizable enough to completely replace and outperform your current system
- Ready to scan barcodes and QR codes with your phone's camera - no additional equipment required
- Can generate custom barcodes and QR codes for unlabeled stock
- Perfect for multiple users, with customizable access to your entire team, including vendors and suppliers
- Can create data-rich, shareable reports to help you understand your inventory
- Ready to alert you when a product is running low, about to expire, or approaching its end of warranty
- Can create item histories so you can keep track of who had what and when
Ready to see how the right inventory app can make your year-end audit so much easier? Why not giveTry it today, totally free?