Valuing inventory in money: how much cash sits in the warehouse

Asked "how much stock is in the warehouse?", managers are often answered in units. But decisions are made in money: how many so'm are invested in stock, how much of it is moving and how much is lying idle. Balances in units cannot be added across different goods, whereas the value of inventory brings everything to one measure. Calculating it correctly takes a few rules.

At cost, not at selling price

Inventory is valued at cost: the quantity on hand × the unit cost. Valuing at selling price overstates the value by the margin you would earn when selling. Cost includes not only the supplier's price but also the expense of bringing the goods to the warehouse: transport, customs charges, insurance. For example, a purchase price of 40 000 so'm, transport 3 000 and customs 5 000 gives 48 000 so'm. If you value at 40 000 only, inventory comes out 8 000 ÷ 48 000 ≈ 17 percent lower, and the margin looks inflated.

FIFO or average cost

When prices change, it matters at which price the balance is valued. Say there are three lots: 100 units at 10 000 so'm, 100 units at 11 000 and 100 units at 12 000. The total is 3 300 000 so'm. Then 150 units are sold.

• FIFO (first in, first out): the cost of goods sold is 100 × 10 000 + 50 × 11 000 = 1 550 000, and the balance is 50 × 11 000 + 100 × 12 000 = 1 750 000 so'm.
• Average cost: 3 300 000 ÷ 300 = 11 000. Goods sold are 150 × 11 000 = 1 650 000, and the balance is also 1 650 000.

The difference in the value of the balance is 100 000 so'm, or about 6 percent. The method affects both profit and the value of inventory, so agree it with your accountant and do not change it during the year. In management analysis the main thing is to apply the same method every month.

What the report looks like

The overall total is of little use. Break the value down by cut: ABC groups, categories, warehouses, suppliers, age (how many days without movement). For example, total inventory is 520 million so'm:

• Group A: 360 million, or 69.2 percent.
• Group B: 110 million, 21.2 percent.
• Group C: 50 million, 9.6 percent.

If the monthly cost of goods sold is 130 million, inventory covers 520 ÷ 130 = 4 months, about 120 days. This figure is directly linked to the measure of how many days stock sits in the warehouse. Since most of the money is in group A, control, counts and purchasing attention should also be focused there.

Value the count result in money too. For example, one item came out 15 units short and another 6 units over; the first costs 48 000 so'm and the second 30 000. The shortage is 15 × 48 000 = 720 000, the surplus 6 × 30 000 = 180 000, and the net difference −540 000 so'm. In units the difference is −9, but in money it depends on the price of the goods, which is why a manager needs so'm rather than units. Valuing in money helps for small lines too: the difference across a hundred cheap items may be smaller than the difference on one expensive item.

Where money is not visible

Define clearly what should and should not go into the inventory report:

• Goods received on consignment are not yours; count them separately.
• Goods in transit: if payment has gone through but the goods have not arrived, show them on a separate line.
• Defective and returned goods: the unsellable part should not enter inventory at full value.
• Packaging materials and samples: these are money too, but not goods for sale.

Compare the inventory value with the balance in the accounting records. If there is a difference, the cause is usually a document entered late or a wrong cost.

Conclusion

The value of inventory turns a balance in units into the language of management, that is, money. The result is reliable only if the balance and the cost are right. CountLab confirms the balance through stock counts, values the discrepancies in so'm, and uses ABC analysis and the management report to show where the money has gathered.