Finished goods inventory are goods that are ready to be sold to the end user. Managing inventory is one of the critical tasks that need to be handled diligently in manufacturing units.
In this article, we are going to unfold the key details associated with finished goods inventory like the importance of finished goods inventory, how to calculate it, advantages and disadvantages of finished goods inventory, and using software for the same.
What Is Finished Goods Inventory?
The finished goods inventory is the inventory of the final products after quality check, packaging, and labeling, ready to be shipped to distributors and wholesalers for retail sale. Here are some examples of finished goods inventory:
- For a clothing manufacturer, readymade clothes like denim, tops, shirts, and trousers are his finished goods inventory.
- For a shoe manufacturer, the line of shoes like sports shoes, leather shoes, ladies' sandals, and kids' footwear are the finished goods inventory.
- For a food processing company, large batches of packaged food items duly labeled and quality checked are finished goods inventory.
- A furniture manufacturer has finished goods like sofas, dining tables, beds, and other items ready for sale.
These are some of the common examples of finished inventory. More examples of finished goods inventory are toys, utensils, laptops, mobile phones, and many other objects that we use daily. So, any product which is manufactured, quality checked, and ready to be used by the end-user falls in the category of finished goods inventory.
Finished Goods Inventory Formula
Here is the finished goods formula Finished Goods = Beginning finished goods + Cost of manufactured goods - Cost of goods sold
With this formula, the business determines how many inventory items are ready for sale. It contains all the products that have completed the manufacturing and production process.
The manufacturing companies use the finished good inventory formula to:
- Keep a record of the inventory
- Give insight into the products
- Let you know which assets can be liquidated easily
Importance of Finished Goods Inventory
Out of various stages of goods like raw materials, work-in-progress goods, and finished goods, finished goods are the final stage of inventory that is sold to the end customer. Let's understand why it is important.
Cater to the Customer's Demand
The primary objective of any organization is to meet the demand of its customers. With finished good inventory, a manufacturing company can ensure that there is sufficient stock available with them such that it can probably meet the demand of the customer. In case of insufficient goods, it will be difficult to meet the growing demand, thereby impacting the brands' reputation and sales.
Buffer Against Supply Chain Disruptions
The supply chain is an integral aspect of any organizational functioning. However, any disruption in the supply chain can impact the availability of goods. With the help of finished goods inventory, a company can keep a tab on the stock level to ensure that there is buffer inventory available such that it can meet the demand in case of any supply chain issues.
Efficient Production
With the finished inventory, a company can maintain a steady production rate. Timely producing the goods and keeping them in stock can help the company avoid any increase in production. Moreover, this also helps the company to meet a sudden spike in demand for the product. Thus, it makes the functioning of business operations more efficient.
Competitive Edge
The market is getting highly competitive, and for an organization to excel in this environment, it is essential to keep its production systems working efficiently. Having the right stock available with them is crucial to ensure this.
How to Calculate Finished Goods Inventory
Let's first revisit the finished goods inventory formula
Finished goods inventory = beginning finished goods + cost of manufactured goods - the cost of goods for sale.
Now let's unfold the formula
Determining the Finished Inventory
Before going ahead with using the formula, you need to check the company's previous records to find out the number of the finished product at the beginning of the production cycle. The ending inventory for the previous period is the beginning of the finished inventory for the period which you are calculating. For example, let's assume that the ending inventory for an accounting period was Rs. 13,000. Now, this value becomes the beginning cost of the finished inventory for the next period.
Cost of Manufactured Goods
If you have found the beginning finished goods inventory, the next thing is to calculate the cost of the manufactured goods. This refers to all the expenses that your business incurs while manufacturing a particular product. It can include labor costs, raw material costs, overhead expenses, and others. For example, a company spends Rs. 12,000 as labor costs, Rs. 8,000 as an overhead expense, and Rs. 2,500 for repair. So, the total cost of manufactured goods amounts to Rs. 22,500 for the entire period.
Calculate the Cost of Goods Sold
Cost of Goods Sold refers to the total amount that a manufacturing company bears from the start of the manufacturing process to the completion. It includes the cost of raw materials, vendor fees, and supplies cost. For example, a company spends Rs. 20,000 for raw materials, Rs. 10,000 for shipment fees, and vendor payments. So, the total cost becomes Rs. 25,000.
Combining the Costs
Now you need to add the beginning finished goods inventory to the cost of manufactured goods. Let's assume that the cost of the beginning finished goods is Rs. 100,000 and Rs. 50,000 is the manufacturing cost. Adding these values, we get a total cost of Rs. 150,000.
Now Subtract the COGS
With the above steps, you have the combined cost. Subtract this cost from the cost of goods sold. The resulting difference will become the total finished goods inventory value. Let's assume that the COGS was around Rs. 200,000. So, the cost becomes
Rs. 200,000 - Rs. 150,000= Rs. 50,000
This value highlights the amount that your company has in its completed inventory and is ready to sell to the customers. This value can help in evaluating the financial and operational information.
Advantages of Finished Good Inventory
Identify liquefiable assets
With the finished goods inventory calculation, it becomes easier for businesses to figure out the inventory that is high selling as compared to the ones that are slow in selling. This eventually helps the company identify the liquefiable assets available to them.
Meeting customer demand
Another significant benefit of the finished goods inventory is that it helps the company to quickly meet the demand of the customer without delay in the orders. With the calculation of the finished good inventory, a company can keep a close check on the available inventory in the market, thus making it easier to meet the demand of the customer.
Reducing lead times
It can also help in reducing the lead times for customers. Since the company can easily fulfill the orders from the inventory rather than producing the products from scratch, it becomes easy to reduce the lead time, thereby increasing the efficiency of the company.
Create a Buffer Stock
Another significant advantage of finished goods inventory is that it helps in creating a buffer stock or buffer inventory. Since you have a tab on the inventory status, it is easy for the company to maintain a buffer, and meet the demands of the customer in case of a sudden spike.
Better Planning
Maintaining finished goods inventory can help companies better plan their production schedules and inventory levels. By having a clear understanding of their inventory levels, companies can make more informed production decisions and avoid stockouts.
Disadvantages of Finished Goods Inventory
While there are several benefits of finished good inventory, there are certain disadvantages too. These are highlighted below:
High carrying costs
The first downside is the cost associated with maintaining the finished goods inventory. The cost of storage, handling, and obsolescence, all these together add to the cost that the company needs to bear. Thus, it may impact profit margins.
Risk of an inventory pileup
While the finished goods inventory can help the company meet customer demand, it also comes with the risk of inventory pile-ups. If there is a sudden decline in the demand for any particular inventory item, the company may end up with an excess inventory of products that are no more in demand.
Obsolescence
Sometimes finished goods inventory can become obsolete over a period of time; this is especially true in the case of products that come with a shelf life. Some reasons can be bad quality, inaccurate demand forecasting, and poor inventory management. This can result in write-offs and add to the inventory disposal cost.
Quality control issues
In addition to maintenance and storage of the finished goods inventory, it is equally significant to keep a check on the quality of finished goods. Products can be damaged or expired, which can impact a business's reputation, thereby resulting in write-offs.
Managing Finished Goods With Inventory Management Software
Managing inventory manually can be a very challenging task and has many downsides like manual errors and miscalculations. An inventory management software like TranZact is a boon for SME business owners. With streamlined inventory processes, your business can reach new heights of success.
The benefits of using inventory management software are not limited to this rather. Additional benefits are highlighted below:
Track Inventory Levels
It helps in keeping track of the inventory as well as its location. This can be eventually used to determine when we need to reorder the particular inventory.
Monitor Expiration Dates
An inventory management software is designed to manage even the smallest aspect of end-to-end inventory management. For example, it can be used to see if the good has an expiration date, and hence it will alert you when the stock is about to expire.
Improve Accuracy
With the right inventory management software, you can easily reduce the probability of an error. Since the entire process is automated, there is a lesser probability of manual error or faults.
Trust TranZact's Cloud-Based Inventory Solutions!
The supply chain is an integral aspect of any business, and maintaining the inventory is one of the critical aspects of the same. With the help of the right tools and technologies, companies can easily keep a tab on the flow of the inventory. TranZact's cloud-based software offers a modern inventory solution designed specifically for manufacturing businesses. It can be easily integrated into your business, thereby giving you complete control over the entire inventory management process, making it efficient and effective!
FAQs on Finished Goods Inventory
1. What are the four different types of inventories?
The four different types of inventories are raw materials, finished goods, work-in-progress and maintenance and repair supplies. Different types of inventories cater to different functions of the manufacturing business.
2. What are the risks associated with too much inventory?
As we know, inventory maintenance is one of the critical aspects of any organization. However, if there is excessive finished inventory in the warehouse, there are certain costs associated with it, like its storage, insurance, and upkeep. This will lower your profits and there will also be risks of inventory getting obsolete or dead.
3. How do companies handle their finished goods inventory?
To handle their finished goods, businesses track their inventory levels, forecast demand, monitor lead times, and adjust reorder points. Additionally, they use inventory management software to automate inventory processes and minimize the possibility of errors.
4. What distinguishes finished goods inventory from raw materials inventory?
Finished goods inventory includes products that are completely manufactured and ready for sale, while raw materials inventory consists of materials that are utilized in the manufacturing process. Raw materials inventory is typically procured and stored until it is needed for production.
