You can probably relate to that clean slate feeling that comes with the beginning of a new accounting period.
But, although a new period means redoing accounting calculations like your beginning (or opening) inventory, it doesn’t mean the slate is completely clean. You’ll enter the accounting period with a different beginning inventory than you had when the previous period began — so it’s more like passing a baton than starting fresh.
So what exactly is beginning inventory, and how does it factor into your financial reporting?
The importance of beginning inventory
Beginning inventory is the starting point for your inventory in a new accounting period. It represents the monetary value of the finished goods you had on hand when the previous period ended before factoring in inventory purchases — and it serves as a bridge from one period to the next.
Why tracking beginning inventory matters
These are the key benefits of tracking beginning inventory.
Effective inventory management
When you have a clear view of your starting point, you can gain insights into how much inventory you have on hand, helping you identify sales trends and prevent potential stockouts or overstocks. This knowledge empowers you to make informed decisions about how much inventory to purchase and how to price your products.
You’ll then be better equipped to optimize your days in sales and inventory turnover (how quickly you sell your inventory) and minimize carrying costs (the expenses associated with storing the products in your inventory).
Accurate cost of goods sold (COGS) calculation
The cost of goods sold (COGS) calculation represents the direct costs associated with producing or acquiring the goods you sold during a given period. By subtracting COGS from net sales, you can determine your gross profit, which you’ll then use to find your net income (aka: the bottom line).
Why is all of this relevant to the inventory you open the period with? Well, here’s the COGS formula:
Beginning Inventory + Purchases – Ending Inventory = COGS
Reliable financial reporting
On your balance sheet, you’ll report beginning inventory as a current asset — an asset you expect to be converted into cash or used up within one year. An accurate beginning inventory ensures your financial statements and reported assets are accurate, which is crucial for fostering trust with investors, creditors, regulatory bodies, and other stakeholders.
Strategic planning
Analyzing how your beginning inventory changes over time gives you valuable insights into how well products sell, which products are most popular, and how seasonality affects demand. With this knowledge, you can allocate resources more effectively and make strategic adjustments to keep your business competitive and profitable.
How to calculate beginning inventory
Learning how to find your beginning inventory is surprisingly easy — it doesn’t even require you to do math. Just memorize this principle: The beginning inventory for one period equals the ending inventory of the period that came before.
Common inventory valuation methods
The beginning inventory calculation is about as simple as they come, but to get there, you need to calculate your ending inventory, which requires knowing the value of the goods you have for sale when the period closes and opens — a value that depends on the inventory valuation method you choose.
Here are three of the most common methods for valuing ending (and then beginning) inventory.
First in, first out
The “first in, first out” (FIFO) costing method operates on the assumption that you’re selling your oldest inventory items first. If you use FIFO, the cost of your beginning inventory will reflect the cost of the most recently acquired goods that are still in stock.
Last in, first out
“Last in, last out” (LIFO) flips the script, assuming your newest inventory items are the first to sell. If you use the LIFO method, your beginning inventory value is based on the cost of the oldest goods. Here’s the ending inventory formula for LIFO:
Weighted average cost (WAC)
The weighted average cost (WAC) valuation method takes a middle-ground approach, calculating an average cost for all units in your inventory. This average cost is then used to value both COGS and ending inventory. Here’s the formula:
Ending Inventory = Weighted Average Cost per Unit x Number of Units Remaining
When to use beginning inventory
Beginning inventory isn’t just a number you calculate at the start of a new period. It’s a dynamic figure that plays a role in various aspects of your business operations. Here are some of the key scenarios where this number comes into play.
Preparing financial statements
At the end of each accounting period, you’ll need your beginning inventory figure to calculate COGS and accurately prepare your income statement and balance sheet. These financial statements are crucial for internal decision-making, securing funding, and complying with regulatory requirements.
Analyzing inventory turnover
By comparing your beginning inventory to your ending inventory and sales figures, you can calculate your inventory turnover ratio, a metric that reveals how efficiently you’re managing your inventory to guide decisions about purchasing, pricing, and marketing strategies.
Reconciling inventory records
Periodically conducting a physical inventory count and comparing it to your recorded beginning inventory identifies discrepancies like shrinkage or errors, improving the accuracy of your records.
Identifying slow-moving or obsolete inventory
Your beginning inventory won’t be the same from period to period. Tracking changes over time lets you spot items that linger a little too long on the shelf. By identifying your aging inventory, you can take proactive measures like offering discounts or adjusting your product mix to avoid obsolescence-related losses.
Budgeting and forecasting
Use beginning inventory as a baseline for projecting your future sales and inventory needs. With this information, you can create realistic budgets, forecast cash flow, and make informed decisions about resource allocation.
Evaluating the impact of pricing changes
When you raise or lower your product prices, it’s important to analyze the impact those changes have on sales to gauge customer behavior and price sensitivity. Seeing how shoppers react to pricing changes helps you fine-tune your strategies to maximize profitability and keep customer loyalty strong.
Streamline your inventory calculations with Fishbowl
Calculating your beginning inventory, COGS, and inventory value can get overwhelming. But staying on top of it all is easier with Fishbowl, the all-in-one inventory management software solution that uses automation to track inventory, manage raw materials, and enhance operational efficiency. And with Fishbowl’s QuickBooks integration, you’ll never have to worry that financial reports are inaccurate or out of date.
Are you ready to take control of your inventory and gain end-to-end visibility over your finances and operations? Schedule a demo of Fishbowl, the intuitive, scalable, and user-friendly inventory management platform.