Whether you run an auto body shop, a retail store, or a law firm, taking a year-end inventory can help your business close the books on the past twelve months while getting organized for the year ahead. In this article, we’ll dive into the importance of a year-end inventory count and explain exactly how to calculate your end-of-year inventory.
We’ll also help you understand the difference between a year-end inventory and a cycle count, what to do if you’ve got more stuff than you can possibly count, and how what your annual audit reveals can help you forecast demand for the year ahead. We’ll also cover how inventory apps can make your yearly counts that much easier.
What is a year-end inventory count?
A year-end inventory count reveals just how much available inventory value your business has on hand at the end of the year. It should be a comprehensive review and include all the different types of inventory. A business will usually need to pause operations while performing this annual audit to ensure an accurate snapshot of available inventory.
By getting an accurate look at what’s in your company’s inventory, you’ll be able to comply with tax requirements, corporate audits and provide accurate data to your accounting team. You’ll also have the data you need to detect inventory shrinkage and forecast what inventory you might need in the year ahead. And, while you’re at it, you’ll have a chance to get your inventory organized for the new year.
While most businesses perform this physical inventory count at the end of the calendar year, mid-year is also a common choice—as long as that works for your accountant and your business tax returns.
What’s the difference between year-end inventory and an inventory cycle count?
A physical, year-end inventory is performed annually to verify that all the inventory you actually have on hand matches the numbers in your inventory management system. On the other hand, an inventory cycle count audits a small portion of inventory, a little bit at a time.
Over time, cycle counts will audit everything you’ve got on hand, but it could take a whole year to achieve this. An inventory cycle count will never give you an exhaustive, comprehensive, and verified list of everything you’ve got on hand in real-time.
A year-end inventory usually requires your business to cease operations and focus on counting every single thing, whereas an inventory cycle count can easily occur during regular business hours.
There are three notable ways to perform an end-of-year inventory count. They are the FIFO method, the LIFO method, and the weighted average (or average cost) method.
Each method attempts to solve for ending inventory, a popular inventory calculation. The formula is: Beginning Inventory Value + New Inventory Value – Cost of Goods Sold.
All three accounting methods will provide different values for this equation—and will yield different results. Keep reading to figure out which method is the best fit for your business.
First in, first-out method (FIFO)
This accounting method assumes that your business sells or consumes the inventory it received first, well, first. That means that t-shirts purchased in 2020 would be “sold” before the same t-shirts purchased in 2021. In other words, your business’s “remaining inventory” would include stock that was acquired most recently.
The FIFO accounting method is ideal during times of high inflation. That’s because those lower, older costs of goods sold can be applied to whatever’s being sold, yielding a higher net income—and a higher value of ending inventory, too.
Last in, first-out method (LIFO)
On the flip side, the LIFO accounting method calls for a business to sell its most recent purchases and acquisitions sooner. This means that the older, lower cost of older products will be reported as “remaining inventory.”
Using LIFO will usually lower net income but can be pretty advantageous on tax returns when prices are on the up and up.
Average cost method
Also known as the weighted average method, the average cost method utilizes the weighted average of all inventory paid for within a given period to determine the cost of goods sold and available inventory value.
The average cost method is the easiest, cheapest way to calculate year-end inventory. It’s also way less prone to manipulation. 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 about inventory counting methods.
What if your business discovers inventory shrinkage?
Businesses often uncover inventory shrinkage during end-of-year inventory counts. After all, only an actual, physical count of your inventory can reveal whether what you’ve got on hand matches what you’ve got on paper (or on a spreadsheet or inventory app.)
What is inventory shrinkage?
Inventory shrinkage happens when there’s less actual, physical inventory than what’s listed on inventory records. This can happen due to human error, vendor shortages, damaged stock, lost inventory, or inventory that’s been stolen.
Inventory shrinkage can drastically affect profits and is a problem that usually requires further investigating.
What to do about inventory shrinkage
If your business uncovers inventory shrinkage during an inventory count, your team will want to look for more information. If you’re using inventory management software or performing inventory cycle counts, you may be able to sift through past inventory records to determine when shrinkage occurred.
Put your detective skills to good use. Widespread, significant shrinkage might indicate fraud or theft. One-off mistakes tend to reveal clerical errors. And damaged goods are self-explanatory.
Once you’ve uncovered and investigated inventory shrinkage, your business might put guardrails into place to prevent further profit loss. Common preventative measures include:
Tightening security where your inventory is stored—perhaps install cameras or lock up high-value items
Training employees on how to properly account for inventory during cycle counts or on an inventory app
Only allowing particular, trained employees to accept and inspect the new inventory
Always verifying invoices, purchase orders, and delivery slips when new inventory arrives
Reviewing daily transactions right on your inventory app, every day
Checking your inventory shrinkage often via cycle counts to ensure the problem is getting better, not worse
Discovering inventory shrinkage isn’t fun, but it’s a wake-up call many businesses need.
Or, what if you have too much inventory?
Once you complete your year-end inventory, you might realize that you’ve got more physical inventory than you expected. And if you have way more inventory than you want or need, you might need to think of some ideas to deal with this excess inventory.
First off, determine what excess inventory will be okay to use or sell next year. Then adjust your plans, budget, and orders for next year accordingly.
Once you’ve figured out what your business still needs for the year ahead, it’s time to start getting creative. What items could be sold at a discount? What kind of sale or promotion might help you recover as much cash as possible?
There may also be items in your inventory that could be repurposed in another way, or donated. If you donate excess inventory, talk to your accountant about writing off those donations, if possible.
Finally, you might want to chat with a liquidator about buying your excess inventory. No, it won’t be profitable, but you can cut your losses, clear up space, and move forward.
Using 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 used (or didn’t use) certain items over the past twelve months. A detailed snapshot of your available inventory can help your business forecast demand for the year ahead.
Plus, by reviewing what hasn’t sold, you can make a plan to stir up demand with promotions, sales, and marketing campaigns. These strategies can help you move old available inventory, so you can focus on restocking only what you know your customers will want next.
How inventory management software can help
Inventory management software allows businesses to track their inventory using modern technology and powerful automation features. And inventory software doesn’t just help streamline year-end inventory counts, but inventory cycle counts and inventory transactions that happen every single day.
When selecting inventory software, look for a product that offers critical features designed to save you time, money, and stress. Ideally, the product should be:
Accessible from any place, at any time—even across the country
Work like an app on phones, tablets, and computers your business already owns
Truly a breeze to set up—no seminars or training manuals required
Detail-rich and customizable enough to completely replace and outperform your current system
Ready to scan barcodes and QR codes using your phone’s camera—no extra equipment required
Capable of generating custom barcodes and QR codes for unlabeled stock
Perfect for multiple users, allowing customizable access to your whole team, including vendors and suppliers
Able to create data-rich, shareable reports that help you understand your inventory
Ready to alert you the moment you’re running low on a product, or it’s expiring or approaching warranty end
Able to create item histories, so you can understand who had what, when