If you want a healthy business, it is a good idea to regularly check your inventory value. The benefits of regularly doing inventory valuation calculations are:
- increased risk management and planning - an overview of what represents the largest value of your inventory held up against expiration dates. This is an important tool for prioritizing sale activities, to minimize the risk of losing expensive goods.
- Correct cost price calculations - you can calculate the cost of goods more accurately, and thereby get the correct contribution margin and contribution margin percentage in connection to a sale.
- Easier revision and tax valuation - It is important to keep track of inventory value, as this reflects the company assets and is an important basis for the annual tax valuation.
The importance of regular inventory valuation calculations varies. For companies trading perishable foods or products that lose value quickly e.g. medicine and electronics, it is of great importance to know the inventory value, to avoid unnecessary losses.
Inventory value can be based on purchase price alone (the price stated on the supplier’s invoice), or purchase price plus additional purchase costs connected to the purchase, such as freight, customs, processing, etc.
There are different ways of calculating inventory value, which are more or less correct and accurate. The most common are described below.
The ongoing calculation of the inventory value is primarily for managing the business. The inventory valuation calculation musts in any case be done when the annual accounts are due. This is done by regular stock-taking. By comparing the results of stock-taking to the inventory system, you can see the losses through the past year.
The most common method of inventory valuation calculation is FIFO - First In First Out.
When you go by FIFO, you assume that the goods you take from stock are always the first put into stock - even if it, in reality, is not the case.
If your inventory is full of bicycles, it is not important to know if the bike you pick for an order, is from a lot from a purchase in march or a lot purchased in April. But when doing inventory, you assume it’s the lot from March.
When running a food company, you will probably not simply use FIFO for inventory valuation calculation, but also use it in practice by taking the oldest lot first to avoid waste. Many food companies might even practice FEFO - First Expired First Out, i.e. picking the lot with the shortest expiration date, even if it isn’t the first purchased. But even when practicing FEFO, many will still do stock-taking by FIFO.
Accurate inventory value calculation
If you have a system that registers the exact goods entering and leaving your inventory - i.e. not just registering the pick of a jar of jam, but which exact jar and from which exact lot - it enables you to calculate the accurate value of the inventory.
Practicing FEFO, and thereby always picking goods with the shortest expiration date, your inventory will also be calculated by FEFO.
In terms of value, there will not likely be much difference, since there are often only minor discrepancies between FIFO and FEFO.
It is also an option to go by the so-called weighted average. This calculates the inventory value by the pricing set at the start of the term, and the prices set for goods purchased or produced through the year.
In tracezilla it is possible to make an exact inventory valuation calculation at any given time and to export a report as PDF or an Excel document for further processing.