Finished Goods Inventory: How To Calculate & Why It’s Important for Business

You’ve invested time and effort, and now you have a product ready to be shipped. But before you can celebrate with your first customer, there’s one crucial step: inventory management for finished goods.

For any e-commerce business, managing inventory is a perpetual movement. A delicate balance must be struck between keeping enough inventory to satisfy consumer demand and not being overly burdened by storage costs. This is where the concept of finished goods inventory comes in.

This guide will equip you with everything you need to know about finished goods inventory, from understanding its role to mastering the art of managing it effectively.

SPExpress is your strategic 3PL partner in Canada. At SPExpress, we offer efficiency, scalability, and comprehensive shipping and warehousing solutions to businesses of any size, easing the burden on businesses. With the help of our comprehensive warehouse and fulfillment solutions, you can take control of your inventory management right now. Our customized services are made to protect your inventory, make the most of storage, and fulfill orders quickly. We are ready to take your order fulfillment game to new levels. Contact us today to learn how we can assist you with your inventory management and order fulfillment strategies.

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At SPExpress, we offer efficiency, scalability, and comprehensive warehousing solutions to businesses of any size, easing the burden on businesses. Contact us to find out more about how we can make order fulfillment and warehouse management simple for your business today!

What is the Finished Goods Inventory?

Finished goods inventory (FGI) refers to the stock of items ready for immediate sale to customers. These are complete products that don’t require further manufacturing or assembly. These are items that have gone through the entire production process and are now warehoused, waiting to be shipped to customers. Essentially, it’s the inventory that directly translates into sales.

Think of it this way: imagine you run a clothing store. The shirts, pants, and dresses hanging on your racks are all part of your finished goods inventory. They’re ready to be picked off the shelf and purchased by a customer. On the other hand, raw materials like bolts of fabric or spools of thread wouldn’t be considered finished goods because they need further processing before becoming sellable products.

Careful monitoring of the inflow and outflow of products is required for enterprises to maintain optimal FGI levels. Here’s where having reliable inventory management solutions is helpful. It streamlines everything from purchasing raw materials and receiving orders to shipping finished products and invoicing customers

Why is the Finished Goods Inventory Important?

There are numerous advantages for your company when you use this technique to calculate your finished inventory accurately. Finished goods inventory plays a critical role in business success. Here’s why:

Enhanced Financial Budgeting: Accurate asset values are crucial for financial records such as balance sheets. Budgeting and financial reporting can be more accurate when you know the precise value of your finished inventory.

Accurate Record-Keeping: Even insignificant discrepancies in inventory accounting add up. To ensure accounting accuracy, you can track work-in-process (WIP), production, and unfinished goods inventories with precision by using the finished goods formula.

Reduced Material Waste: By pinpointing optimal inventory levels, you can prevent overspending on warehousing a surplus of raw materials and finished products. This translates to significant cost savings.

Optimized Inventory Management: The finished goods formula empowers you to track direct labour and manufacturing costs. This knowledge can be leveraged to identify areas for production process improvement and explore automation opportunities.

Minimized Stockouts: Out-of-stock situations lead to frustrated customers encountering backorders or order cancellations. The formula helps you predict inventory needs effectively, preventing stockouts.

Buffers Against Demand Fluctuations: Having a stock of finished products on hand allows you to weather unexpected surges in customer demand. This prevents stockouts and the costs associated with scrambling to fulfill orders.

Meets Customer Expectations: Today’s customers crave fast delivery times. By keeping finished goods in stock, you can ensure you meet these expectations and avoid disappointing customers with long wait times.

How To Calculate Finished Goods Inventory?

Before diving into the formula, let’s get familiar with some key terms:

Beginning Finished Goods Inventory: The value of finished goods a business has in stock at the start of a specific period (typically a month).

Ending Finished Goods Inventory: The value of finished goods a business has in stock at the end of a specific period.

Cost of Goods Manufactured (COGM): The total cost of all raw materials and labour that went into producing the finished product.

Cost of Goods Sold (COGS): The total cost of all finished goods sold to customers during a specific period.

Now, here’s a step-by-step guide for the formula of finished goods inventory:

Finished Goods Inventory = (COGM – COGS) + Value of Previous Period’s Finished Goods

To calculate finished goods inventory, you’ll first need to determine both COGM and COGS using separate formulas:

COGM = (Beginning WIP Inventory + Total Manufacturing Cost) – Ending WIP Inventory

COGS = (Beginning Inventory + Purchases During the Period) − Ending Inventory

Note: Ensure you maintain consistency in the accounting period throughout these calculations.

Let’s illustrate this with a practical example:

Imagine you run an e-commerce business selling candles, and you want to calculate your finished goods inventory for the last quarter.

Step 1: Decide the Time Period

For accurate results, use the same time period for all formulas. Let’s assume you want to analyze your finished goods inventory for the last quarter.

Step 2: Gather Necessary Data

Here, you’ll need to collect specific information from your business records. In this example, let’s assume you have the following data:

Beginning WIP Inventory: $1000

Ending WIP Inventory: $300

Total Manufacturing Cost: $500

Beginning Inventory: $250

Ending Inventory: $400

Purchases During the Period: $550

Value of Previous Year’s Finished Goods: $100

Step 3: Calculate COGM and COGS

Now, plug the Data into the COGM Formula

COGM = (Beginning WIP Inventory + Total Manufacturing Cost) – Ending WIP Inventory

COGM = ($1000 + $500) – $300 = $1,200

Do the same for COGS:

COGS = (Beginning Inventory + Purchases During the Period) − Ending Inventory

COGS = ($250 + $550) – $400 = $400

Step 4: Calculate Finished Goods Inventory

Finally, use the formula with the acquired COGM and COGS values, along with the previous period’s finished goods data:

Finished Goods Inventory Formula = (COGM – COGS) + Value of Previous Year’s Finished Goods

Finished Goods Inventory = ($1,200 – $400) + $100 = $900

Therefore, based on this example, your company’s finished goods inventory for the last quarter would be $900.

Efficient Finished Goods Inventory Management

Calculating COGM, COGS, and finished goods inventory on a regular basis can be a time-consuming task. This is why many e-commerce businesses outsource fulfillment and inventory storage to third-party logistics providers (3PLs). 

3PL partners not only provide professional order fulfillment services but also simplify inventory auditing and management through robust inventory management software. 3PLs automate data tracking and record-keeping, saving you significant time and resources.

Here’s a closer look at how 3PLs like SPExpress can empower you to streamline your finished goods inventory management:

Real-Time Inventory Tracking: As your organization grows, it becomes more difficult to manually track inventory across several locations. 3PLs typically offer a user-friendly dashboard that provides real-time visibility into your inventory levels across all storage facilities and sales channels.

Actionable Inventory Insights: You’ll gain insights into comprehensive analytics that track metrics like SKU velocity, days on hand, average unit sales per day, and storage costs. This empowers you to make data-driven decisions regarding inventory management.

Automated Reorder Point Notifications: Running out of stock can lead to lost sales and frustrated customers. 3PLs provide a platform that allows you to set automated reorder point notifications for each SKU. This ensures you’re alerted when inventory dips below a predefined threshold, allowing you to replenish stock on time and avoid stockouts.

Improved Demand Forecasting: 3PLs use advanced analytics tools to equip you with the data you need to make informed decisions. By analyzing historical sales data, seasonality trends, and marketing campaign performance, you can gain a clearer picture of future demand. This enables you to strategically allocate inventory across fulfillment centres to optimize order fulfillment and delivery times.

Best Practices for Finished Goods Inventory Management

While the finished goods inventory formula provides a valuable metric, effective management goes beyond calculations. 

Implement a Safety Stock Strategy: Maintaining a safety stock buffer of critical SKUs helps mitigate unexpected demand surges or supply chain disruptions. This ensures you have enough inventory on hand to fulfill orders even during unforeseen circumstances.

Embrace the Power of Inventory ABC Analysis: The ABC analysis categorizes your inventory based on unit cost and sales volume. You can simplify management for low-value (C) products by giving priority to high-value (A) and medium-value (B) items with stronger inventory controls.

Regularly Conduct Inventory Audits: Periodic physical inventory audits help identify discrepancies between your accounting records and actual stock levels. This allows you to rectify any errors and maintain data accuracy.

Invest in Warehouse Management Systems (WMS): WMS software streamlines warehouse operations by automating tasks like receiving, picking, packing, and shipping. This not only improves efficiency but also enhances inventory control and accuracy.

By combining the power of the finished goods inventory formula with these best practices and leveraging technological solutions offered by 3PLs, you can achieve optimal finished goods inventory management. This translates into reduced costs, minimized stockouts, improved customer satisfaction, and ultimately, a profitable e-commerce business.

An effective finished goods inventory management system is essential to every successful e-commerce enterprise. It is possible to create a strong system for the best inventory control by comprehending the concept, applying the formula efficiently, and putting best practices into practice. 

Remember, a data-driven approach is essential. Leverage the finished goods inventory formula and the insights gained from reliable inventory management software to make informed decisions. By taking control of your finished goods inventory, you can empower your e-commerce business to flourish.

SPExpress is your strategic 3PL partner in Canada. At SPExpress, we offer efficiency, scalability, and comprehensive shipping and warehousing solutions to businesses of any size, easing the burden on businesses. Get in touch with us right now to find out how our fulfillment and warehousing services may help your company. Don’t let inventory problems ruin your company; work with us to find dependable, effective solutions that give you more control. We are ready to take your order fulfillment game to new levels.

Contact us today to learn how we can assist you with your inventory management and order fulfillment strategies. Together with our experts, you can start on the path to reliable and efficient inventory management right now.

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At SPExpress, we offer services from order fulfillment to supply chain management, which includes freight forwarding, transportation, warehousing, picking and packing, inventory and supply chain management, and order fulfillment. We work closely with our customers to ensure their 3PL needs are being met properly. We understand how valuable working with a reputable 3PL provider can be and how it can help our customers focus on growing their businesses. 

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