What about cost of goods sold?
It’s important to know the value of the inventory you’re holding in stock. But it’s also important to know the value of the inventory you’ve sold. That information will help you get a sense for how much money the business is making.
That’s where cost of goods sold (COGS) comes in.
COGS = beginning inventory + purchases - ending inventory
This formula tells you how much inventory you had to buy in order to earn your sales revenue. Most businesses use this simple COGS formula for inventory accounting. When it comes to working out your profit, you can dig into more detail by factoring in things like storage and handling costs. See more on COGS in our guide to starting a business.
What is stocktaking?
Stocktaking is used to double-check the numbers in your financial records. You do this by physically counting every item of inventory in your possession.
Compare that number to what you have on your balance sheet. They won’t often match up. Generally there will be less in reality than on the books. That missing inventory is generally assumed to have been damaged and dumped, or stolen.
Why is stocktaking important?
You may be required to do a stocktake before submitting your business tax return. Besides that, it’s a really good way to check and correct your financial numbers.
How often should I do a stocktake?
Tax authorities may require you to do a stocktake at the end of the financial year. Some businesses do it far more often than that. For example:
retail businesses may do it quarterly (if they sell seasonal goods)
hospitality businesses often do it once a month
manufacturers of perishable foods may do it even more frequently
Alternatives to stocktaking
If the numbers of a physical stocktake closely match the numbers in your financial records, you may be able to wait longer till your next one.
Computerised inventory systems can sometimes deliver this level of accuracy. They automatically count inventory as you order it, and subtract it when you sell it. You can complement this technology with cycle counts, where you do a physical count of a few random product lines to check that your book records reflect reality.