Taking inventory at the end of the year sets up your small business for a successful year ahead. Even when you rely on a computerized inventory management system, a periodic manual count can boost accuracy and highlight possible efficiency issues.
You can try it this year with our step-by-step guide to an effective end-of-year-inventory process.
What Is an End-of-Year Inventory Count?
An end-of-year inventory count involves determining how many available items for sale you have on hand. You'll physically take note of every product in your store, warehouse, or stock room. Then, you'll compare this count to your computerized inventory so you can correct errors and streamline ordering.
You may have questions about what items count as part of your inventory. In addition to finished products, supplies, parts, works in production, and raw materials all constitute part of your inventory under.the U.S. Generally Accepted Accounting Principles (GAAP).
Why Do You Need to Calculate Your Inventory?
Counting inventory at the end of the year ensures you have accurate income statements and balance sheets. You'll need these items to conduct a precise financial analysis for planning purposes. Lenders and investors also expect full, accurate financial statements when you seek funding for your small business.
The amount of inventory you have on hand informs the ordering process. Often, the process of taking year-end inventory uncovers errors to fix and steps to streamline. As a result, you can get to the root cause of discrepancies between your digital record and the physical inventory on hand and correct these issues.
Year-end inventory creates an opportunity to start the new year fresh by improving inventory systems to cut costs and increase efficiency. For example, you can compare your end-of-year inventory to your net income. If it's worth more, you could be spending too much on product and not enough in other areas.
How to Conduct an End-of-Year Inventory Count
We've broken down the year-end inventory count into three simple steps.
Step 1: Create a Classification System
You can streamline the inventory process by grouping products into several general areas. We recommend the ABC method, which is as simple as it sounds:
- A for items you expect will fly off the shelves
- B for middle-of-the-road items in both popularity and price
- C for inexpensive items with fewer orders
You can also classify by criteria like price point, sales division or product type.
Step 2: Count the Items on Hand
You can use a handheld scanner to count the number of each product in your current physical inventory. If you have a small store, you can also do it the old-fashioned way with pen and paper.
Either way, be sure to note differences between the number of items in your stock record and the actual number on hand. You should also update the stock record so it accurately reflects your inventory.
Step 3: Finalize Your Year-End Inventory Value
Follow these simple steps to get the final inventory value:
- Count the number of distinct items in each category.
- Multiply each total by the cost for that item
- Add the multiplied costs for all items, which equals your total ending inventory value.
Finally, calculate the value of your year-end inventory. You'll need this number when you file your annual income taxes. Most payment processing software automatically provides your year-end inventory value, but you can also calculate it manually with this formula:
[Value of your inventory at the beginning of the year] + [Value of all inventory added during the year] – [Total cost of goods sold (COGS)] = Year-end inventory value
End-of-Year Inventory Best Practices
These strategies can streamline the year-end inventory process:
- Select a time when you tend to have lower product stock so you simply won't have as much to count. Many small businesses do year-end inventory during the week between Christmas and New Year's for this reason. You should close the business or do your count on off hours if at all possible to ensure accuracy.
- Designate a team to take on the counting challenge. You'll need to schedule inventory early since employees often take time off at the year's end. You might want to prepare for temporary support to complete the process. Account for all areas where you might have inventory stored. Don't forget about receiving areas, closets, and other locations that you could easily miss. As you think about all possible storage locations, develop a map your team can use during the count.
- Schedule a training day when you have the team in place. At this session, provide detailed instructions to ensure everyone's on the same page. Pass out the map you created with assignments for each team member. It might help for people to work in pairs - one to record the numbers and one to actually conduct the count.
- Count some sections twice to test the accuracy of your inventory methods. For example, have a supervisor spot-check some areas at different parts of the storage area at the beginning of the process to correct issues that could impact precision.
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The Bottom Line on End-of-Year Inventory
While counting inventory on hand may not be your favorite year-end chore, having accurate numbers and perfecting your process can make a big difference for your small business. You'll be able to precisely project your inventory needs for the new year and fix flaws that lead to lost revenue.
You can make the most of the time you invest on inventory with our simple three-step process and recommended best practices.
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