Guide to Managing Closing Stock in E-commerce

Shraddha Thuwal

By Shraddha Thuwal

November 04, 2023

Closing Stock

Closing Stock is the amount of unsold inventory in your business on a specific date. Simply put, it is the inventory that is still in your business and waiting to be sold for a set period. It can take many forms, including raw materials, in-process goods (WIP), and finished goods.

Closing Stock Formula (Ending) = Opening Stock + Purchases – Cost of Goods Sold.

Table Of Contents
  1. Methods to Calculate Closing Stock
  2. Pricing Method Impact on Closing Stock
  3. Benefits of Closing Stock
  4. Strategies to reduce closing stock?
  5. Conclusion
  6. FAQs

Methods to Calculate Closing Stock

  1. FIFO Method or First In First Out Method: The goods purchased first become the goods sold first in this case. The most recent items are kept unsold.
  1. LIFO Method or Last In First Out Method: The last item purchased and kept in inventory is the first to be sold in this method.
  1. Average Cost Method: This method computes the it’s weighted average cost.
  1. Gross Profit Method: For calculating the amount of ending inventory, the gross profit method is used. It does so by applying the company’s historical gross profit percentage to the current period’s net sales and cost of goods available for sale.

Pricing Method Impact on Closing Stock

The method that a company chooses to price its inflation has an impact on its financial position and profits. If the company decides to use LIFO, the cost of goods sold will be higher, lowering the gross profit and thus lowering taxes. It is one of the primary reasons why businesses prefer LIFO accounting over FIFO accounting. Another valid reason is that when using FIFO, the amount of closing stock on the balance sheet is greater than when using FIFO.

The method of inventory management also has an impact on ratios. When FIFO is used, the current ratio (current assets / current liabilities) will be higher. The addition of ending stock will increase the number of Current Assets. If FIFO is used, the inventory turnover ratio calculated as Sales / Average inventory will be lower.

Benefits of Closing Stock

Accounting relies on closing stock for a variety of reasons. First, it gives management a snapshot of the company’s inventory at the end of the accounting period, which is useful information. Second, it is used to compute the cost of goods sold (COGS), which is an important figure in financial reporting. Finally, it can be used to determine whether a company’s inventory levels are adequate and whether there are any potential inventory turnover issues.

Benefits of Closing StockDescription
1. Accurate portrayal of financial positionit provides an accurate representation of a company’s financial position by reflecting the value of inventory at the end of the accounting period. This information is crucial for investors and creditors assessing financial health.
2. Compliance with GAAPit ensures compliance with Generally Accepted Accounting Principles (GAAP), which mandate valuing inventory at its “net realizable value.” This value is the estimated selling price minus any costs to prepare the inventory for sale.
3. Facilitates decision-makingit aids decision-making within a company, especially for managers. Inventory levels, easily accessible through closing stock data, serve as a key input for decisions such as ordering raw materials.

Strategies to reduce closing stock?

  1. Consumer Demand Forecast

Forecasting consumer demand can help you determine how much inventory you should order. This allows you to stock up on inventory so that it is neither too high nor too low that you cannot fulfil orders on time. Ecommerce sellers can calculate consumer demand using historical sales data and Inventory Management Systems (IMS).

  1. Managing Inventory Levels

Maintaining adequate inventory levels is critical for ecommerce sellers, and automating inventory replenishment is essential for this. Automating your replenishment processes can help you order inventory at the right time because orders that are ordered too early become obsolete, and orders that are ordered too late cannot be processed on time. Automation also aids in the reduction of errors and the maximisation of efficiency.

  1. Selling on multiple channels

Ecommerce brands can reach a larger customer base by selling on multiple sales channels such as Amazon, Flipkart, and Meesho. As a result, sales, conversion rates, product visibility, and sales velocity all increase.

  1. Sales Optimization

E-commerce sellers who want to reduce it can use strategies like increasing brand awareness, running targeted advertisements, and implementing promotions. Cart abandonment is reduced by simplifying returns, streamlining checkout, and providing a variety of payment options. Increasing average order value (AOV) through strategies such as kitting and offering free, fast shipping boosts revenue and inventory management efficiency.

Conclusion

Closing Stock is the amount of unsold inventory in your business on a specific date. Accounting relies on closing stock for a variety of reasons. First, it gives management a snapshot of the company’s inventory at the end of the accounting period, which is useful information. It can be used to determine whether a company’s inventory levels are adequate and whether there are any potential inventory turnover issues. Forecasting consumer demand can help you determine how much inventory you should order. Automating your replenishment processes can help you order inventory at the right time because orders that are ordered too early become obsolete, and orders that are ordered too late cannot be processed on time.

FAQs

What is Closing Stock?

It is the unsold inventory in a business at a specific date, including raw materials, work-in-progress, and finished goods.

How is Closing Stock calculated?

Closing Stock Formula (Ending) = Opening Stock + Purchases – Cost of Goods Sold.

What are the methods to calculate Closing Stock?

FIFO, LIFO, Average Cost, and Gross Profit methods are used to calculate Closing Stock.

How does the pricing method impact Closing Stock?

LIFO may result in lower taxes due to the higher cost of goods sold, impacting financial position and profits.

What is the impact of inventory management methods on ratios?

 FIFO increases the current ratio, while LIFO may lower the inventory turnover ratio.

Why is Closing Stock beneficial for accounting?

It provides a snapshot of inventory, aids in computing the cost of goods sold, and helps assess inventory levels.

How does Closing Stock comply with GAAP?

It ensures compliance with GAAP by valuing inventory at its “net realizable value.”

How does Closing Stock facilitate decision-making?

It aids decision-making, especially for managers, by providing key information on inventory levels.

How can ecommerce sellers reduce closing stock?

Strategies include forecasting consumer demand, managing inventory levels, selling on multiple channels, and optimizing sales.

What is the importance of automating inventory replenishment?

 Automating replenishment ensures timely ordering, minimizes errors, and maximizes efficiency in maintaining inventory levels.

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Shraddha Thuwal
Author

Shraddha Thuwal

Shraddha Thuwal worked as a content writer at WareIQ. She actively contributes to the creation of blog posts centered on eCommerce operations, fulfillment, and shipping, in addition to providing insights on various strategies and techniques tailored for eCommerce sellers. With an impressive track record, Shraddha boasts over two years of content writing experience, spanning a spectrum of industries including logistics, supply chain, and media.

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