Finished Goods Inventory: Definition, Examples, Importance & 3 Easy Steps to Calculate Finish Goods Inventory in 2024

All inventory follows a life cycle. It begins as different raw materials being combined together, grows to be work-in-progress, and finally emerges as finished goods.

But finished goods are more than just the last stage of the inventory maturation cycle. They are the key component of being able to participate in the selling of products on eCommerce platforms. Let’s take a look at examples, calculations, and why they are important.

What is Finished Goods Inventory?

Finished goods inventory is the number of goods available for a company to be able to sell to customers and fulfill orders. However, finished goods is a relative term, as a seller’s finished goods could be the raw material for a manufacturer. Therefore, it could mean the inventory lying with a seller that is ready for dispatch to be sold or stock with the company that is prepared to be sent to a customer.

Briefly, finished goods inventory is the stock of a wholly manufactured set of goods. Therefore, it is also called finished product inventory. 

Finished Goods Examples 

Finished goods are the everyday items surrounding us. Here are some examples of finished goods:

You come across all kinds of food and grocery items in a supermarket. These perishables are ready for sale. Similarly, the gadgets or outfits that you adorn are customer-ready in an online or offline electronic store and clothing store.

Finished goods examples include every product available for sales such as fruits and vegetables, processed and canned foods, clothing items, electronics, eggs and packaged meats, toys, petrol and gas, vehicles, and everything else that is available for purchase by consumers in a ready-to-use function.

What is the Finished Goods Inventory Formula and Why is it Important?

Once you know what elements are needed to calculate the finished goods inventory, you can understand why it is critical for you. Here’s the formula:

Finished Goods Inventory Formula

Finished Goods Inventory depends on the expenses incurred for manufacturing the complete stock of goods, the cost of goods sold off, and the value of finished goods inventory from the previous period. This duration could be a month, a quarter, or a year.

Finished Goods inventory = [Cost of Goods Manufactured – COGS] + Previous Finished Goods Inventory Value

There are many reasons why it is a crucial calculation for everyone involved in the supply chain.

Importance of Calculating Finished Goods Inventory

Verifies Gross Profit

For every manufacturer or seller, knowing the value of their inventory helps them to determine their gross revenue and profit margins. In addition, this tally helps in future operational and financial budgeting. You get to establish the expenses on goods manufactured and sold and the value of inventory in your warehouse.

Documents the Current Assets Volume

Finished goods inventory is counted as current assets in the balance sheet, which means they are short-term assets intended to generate revenue for you within a year.

Your production strategy may be based on a ‘Build to Order’ or ‘Build to Stock’ plan. But it determines how many assets you hold at a time. To calculate the finished goods inventory level, you need to confirm the number and value of current assets lying with you after all the sales are made.

Minimizes Material Wastage

The formula helps you understand the finished goods inventory turnover rate. It is the rate at which your finished goods inventory is sold and replenished within a set period of time. When you know the worth of the finished goods remaining versus goods sold by the end of the month, you can ascertain how much inventory was ultimately utilized. Keeping a tab on the finished goods inventory can help you monitor and minimize its wastage.

Streamlines Inventory Management 

Many factors affect your inventory management decisions such as the economic, fiscal, and geopolitical scenario of the country, annual budgets, and other contingencies like war or natural disturbances, industrial dynamics, and price fluctuations. All these factors affect the finished goods inventory level you need to maintain. The formula helps you ascertain the costs you incur on manufactured and sold goods and how much inventory you need to preserve, from the date of your previous performance.

This formula also helps you differentiate between goods that are hot-selling products versus the goods that stay in your warehouse longer. It also enables you to separate high-value goods from others and store them in a more protected space.

3 Easy Steps to Calculate Finished Goods Inventory in 2024

Step 1: Check Finished Goods Inventory of Prior Years

Determine the value of finished goods for the previous period. You reach this figure in the last duration, which could be a month, quarter, or year using the same formula for finished goods as mentioned previously which is:

Finished Goods inventory = [Cost of Goods Manufactured – COGS] + Previous Finished Goods Inventory Value

Step 2: Subtract the Current COGS From the Cost of Goods Manufactured

This step involves the below calculations:

Cost of Goods Manufactured (COGM) refers to the money spent on manufacturing every unit of the finished good. For instance, if you made 400 candles worth ₹200 per piece, your COGM would be:

400 x ₹200 = ₹80,000.

COGM = [Raw materials used + direct labour employed + all manufacturing overheads + beginning WIP inventory] – the ending WIP inventory.

Cost of Goods Sold (COGS): The money spent on manufacturing the products sold is referred to as COGS. So in the above example, if you sold 300 of the 400 candles made, your COGS would be:

300 x ₹200 = ₹60,000.

COGS = [Beginning Inventory + Received Inventory] – Ending or Remaining Inventory

Now deduct the COGS value from the COGM figure:

COGM – COGS

Step 3: Add the Prior Finished Goods Inventory Value to the Answer

Combine the figure you have reached above with the value of finished goods inventory for the last period. Adding the overall value of assets available gives you the finished goods inventory for the current period. You can procure this data from past inventory records.

[COGM – COGS] + Previous Period Finished Goods Inventory

The period considered for the calculation must remain consistent throughout to avoid any discrepancies.

How Do 3PL Fulfillment Companies like WareIQ Help to Efficiently Manage Finished Goods Inventory?

3PL companies assist businesses at every stage of the supply chain. Inventory management is crucial to your logistical success. An experienced 3PL service provider like WareIQ can help you efficiently manage your finished goods inventory. 

Here’s how it can be achieved:

Real-time Data

WareIQ offers advanced real-time data collection and analysis technology throughout the inventory life cycle. This means that you are continuously updated about your inventory levels and whereabouts, across multiple platforms, the moment a change is made. This is necessary to know what inventory is available to you and when. For example, to determine your inventory level, you need to see the number of finished goods ready for sale and the stock already sold and delivered. Real-time updates affect your decision-making and budgeting capabilities and enable you to make faster and more well-informed decisions.

Quality Control

A promising 3PL partner like WareIQ assures you of quality checks throughout the inventory lifecycle, so you know if and when any product has gone bad or has expired and needs replacing. This prudence comes in handy, especially if you are dealing with perishables. Additionally, the way products are stored in the warehouse, picked and packaged when an order is confirmed and shipped to the customer, meets rigorous quality control standards to ensure that everything is done in the most careful and efficient manner.

Automated Systems

The superior inventory management software gives you access to essential data like inventory levels, orders, and billing cycles and can integrate with multiple eCommerce platforms. This data helps you trace the previous and current inventory levels and the goods sold. These automated reports can be triggered at pre-set intervals such as daily, weekly or bi-weekly, to be sent via email or directly to your system via API integration. So all the information you need to know about the finished goods inventory is available at your fingertips.

Superior tech also guides you on scaling up or reducing the manufacturing dependence on seasonality and demand.

Inventory Tracking

WareIQ’s advanced dashboard triggers punctual updates via texts and emails. Further, it creates your company’s branded, fully customizable tracking page.

You can track your inventory in any of WareIQ’s pan-India warehouses from a single dashboard. So you can keep a tab on all the raw materials from Pune, Guwahati, and Hyderabad that you need in Gurugram in the current week, from a single webpage.

Conclusion

Finished goods inventory is responsible for bringing in revenue for your eCommerce business. Hence, it must be regularly monitored and tracked. The preparation you need to do this is a simple calculation that ensures you gather data on all the necessary elements. Along with a capable 3PL partner who provides the data collection and analysis on your behalf, you have fewer things to worry about.

WareIQ is one of India’s fastest-growing eCommerce logistics companies that uses a centralized technology platform to provide every service that is associated with fulfilling eCommerce requirements.

Finished Goods Inventory: FAQs

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