Monitoring inventory levels isn't just vital to keep business flowing; it’s a key component that can affect profit margin as well. Opening inventory, the cash value of a company’s inventory at the beginning of a new accounting period, is a key parameter for measuring the health of a business’s inventory management over time.
Three standard accounting values are needed to calculate opening inventory.
- Ending inventory from the previous accounting period: This is the cash value of stock on the shelves at the end of the last period.
- Purchases made during the last accounting period: This is the cash value of anything added to the inventory during the last period.
- Cost of Goods Sold (COGS): This is the cash value of sales, from the last accounting period, calculated as (cost to produce unit) x (number of units sold); note that this is the cost to produce, not the actual sale price.
This results in a simple calculation to find opening inventory. This beginning inventory equation, or opening stock formula, is: Opening Inventory = Cost of Goods Sold + Ending Inventory - Purchases.
This formula can be used to calculate any of the four values, given the other three are available. If any of the other values are missing from the previous period’s balance sheet, they can be obtained in other ways.
In order to calculate a value for opening inventory when one isn’t available, conduct a physical count of all items in inventory, then sum their costs. This can require extensive manpower but remains the only way to truly capture the value of the on-hand stock at any given moment, if the accounting books are unavailable or if values are in question.
In order to properly manage inventory over an accounting time period, some sort of efficient record-keeping system is needed. This system will need to record and keep track of every time stock is added to, or taken from, the inventory.
For smaller inventory, this can be done periodically by doing a physical count of stock on the shelves and updating the accounting books as needed. For a larger or more complicated inventory, continuous managing is suggested: This normally uses an electronic system or setup of some sort, and every transaction occurs in the accounting records at the same time it occurs physically.
Proper record keeping should track:
- On-hand inventory: What's on the shelves, what has been committed (to a sale, work order, etc) and what has been ordered.
- Inventory overturn: How quickly do inventory items move onto (order) and off of (sale) the shelves?
- Previous accounting periods: This will help build trends to examine the business’s performance.
A useful record-keeping system can be built in Excel or purchased.
Inventory is an asset, in accounting terms, and its cash value is included as an asset in a company’s balance sheet for any period. While inventory itself isn't included in an income statement, the change in inventory is used to calculate the cost of goods sold, which is used on the income statement in comparison to the profit from goods sold to calculate a company’s income.
Overall, good management of opening inventory is a concrete step toward building a business’s bottom line through better inventory management.