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How To Calculate Year End Inventory

Good warehouse maintenance means you keep constant track of your inventory, know how much of each item you have, and can somewhat anticipate which items you will need in the future.  When it comes down to it, you can make a choice to minimize your inventory if you know for almost certain what inventory you are going to need for that period. However, this can lead to problems, especially if you run out of any parts toward the end of the period.

To plan your end of year inventory, you need to know how to calculate how much you will need for the following year. You should not have more inventory than one turn’s worth. If you do not know how much one turn of your store is, there is an easy way to calculate that.

First go to the Retail Owner’s Institute and visit the Benchmarks page. There you will find your retail segment and click through that page to find the Inventory Turnover benchmark for your segment. Find “one turn’s worth” to calculate what one turn’s worth would be for your business—divide twelve months by that Inventory Turnover rate. The maximum inventory you should have on hand at the end of the year should be how much you calculate you need for your next turn. So if your turn is 2 months, you should have sufficient inventory for January and February on December 31.

This calculation is not only useful for your end of year inventory, but also works at the end of any turn. Using the turn methodology, you can manage your inventory in a strategic way throughout the year and determine and maintain your minimum and maximum stock levels during the year to achieve the greatest profit. To calculate the minimum stock for each turn, you should know what your par level is for each month. The minimum amount needed will fluctuate from month to month, so you should look at your sales plans from previous years to determine your par level.

If you are selling your inventory though multiple different channels, it is a good idea to calculate the amount of inventory you will need as a whole, then calculate it within each channel to understand where inventory is needed. Knowing what type of inventory you have and the expectations of its market also determine the amount of inventory you need at any given time. For some products, turnover can be in a matter of weeks while sales are trending for that product while other products like food will turn over in a matter of days.

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