Closing stock refers to the unsold inventories left after the accounting period. It directly affects business profitability, taxation, cash flow, and decision-making. Knowing the value of the closing stock can help an e-commerce business to understand the accurate financial position and help them make better decisions.
Managing inventories plays a key role in an e-commerce business’s success. A report says that inventory losses due to mismanagement or theft contribute to approximately 100 billion US dollars annually. Inventory tracking is quite challenging, especially for an e-commerce business.
What Is Closing Stock In E-commerce?
In a simpler way, Closing stock is the unsold stock that a business could not sell within a specific period. Calculating the closing stock is important for all products-based organisations such as manufacturers, ecommerce businesses, and suppliers. It could be finished goods, raw materials, and work-in-progress goods that are unsold.
A business selling products online stores its goods in warehouses. E-commerce companies aim to sell all their goods to the customer and profit from them. But sometimes, the goods remain unsold at the end of the accounting period and are called closing stock.
“The accounting period is the timeframe during which companies prepare financial reports on their business activities. It can be monthly, quarterly, or yearly.”
Let’s understand with an Example: There is an electronics store that has bought 1000 mobile phones. It was able to sell 800 mobile phones this month. The accounting period of this store is one month. The mobile telephones left now are two hundred, known as closing stock.
Monitoring the Closing stock has various advantages. It helps businesses keep track of inventory levels and prevent overstock and out-of-stock issues. It can even determine the cost of goods sold, which is necessary for businesses.
Difference Between Ecommerce And Traditional Business Inventory
E-commerce inventories are stored in warehouses or fulfillment centers. Sometimes, e-commerce businesses store their inventories in third-party logistics provider warehouses.
However, business inventories are usually stored in physical retail stores or warehouses.
The software tracks E-commerce inventories. However, in traditional businesses, inventories are counted and managed physically.
Why Is Closing Stock Important In E-commerce?
1. Decision Making:
Closing stock plays a vital role in the decision-making process. If the closing stock is too high, the business should offer some discounts, and they will move out of the warehouse storage quickly.
However, if there is less closing stock, the business incurs the price of the product whose demand is higher in the market. Again, low stock indicates to companies that it is time to reorder the product from the manufacturers.
2. Inventory Management:
Closing stock helps businesses keep track of the stock left at the end of a period, ensuring optimal inventory levels. This prevents overstocking, which can lead to warehousing costs and out-of-stock situations, which can harm customer satisfaction.
3. Cost of Goods Sold (COGS):
It is a key metric for understanding profitability and setting competitive pricing. High closing stock in warehouses indicates that more money is spent on purchasing inventories that do not generate as much sales or profit. This may create liquidity issues in a business.
4. Profitability:
Closing stock determines the cost of goods sold in a business, which affects the business’s net profit or net loss.
When closing stock is too high, the cost of goods sold will decrease, and the business will profit. Similarly, if the closing stock is low, the cost of goods sold will increase, and the company will have to bear the loss.
How To Calculate Closing Stock In E-commerce?
Basic Closing Stock Formula:
Closing Stock = Opening Stock + Purchases – (Cost of goods sold)
Opening stock indicates a business has inventory at the start of a specific accounting period.
Purchases indicate the inventory that a business has purchased during a particular period.
Example:
You are doing business with mobile phones. You had a mobile phone worth Rs1,00,000. But in that month you purchase some mobiles whose total worth is Rs50,000. The cost of goods sold is Rs70,000
Closing Stock= 1,00,000 + 50,000 – (70,000) = Rs80,000
Adjusted Formula for Returns and Discounts:
Closing Stock = Opening stock + purchases – (Cost of goods sold + returns + discounts)
Here, returns refer to the total number of products that customers have returned.
Discounts refer to the products that are sold at discounted rates.
Let’s discuss an example.
Let an e-commerce company sell clothes online. The opening stock is Rs 10,000, and the company purchased new clothes for Rs 4000. The cost of goods sold is Rs6000.
The customer returned items of only Rs500. The company offered discounts worth Rs1000.
Closing Stock = 10,000 + 4000 -(6000 + 500+ 1000) = Rs6,500
Valuation Methods For Closing Stock
1. First In First Out
First in, first out (FIFO) is an inventory model in which a business sells its product, which it purchases first from the manufacturers.
The FIFO model is widely used in the pharmaceutical, food and beverage, and retail industries. FIFO shows the actual inventory flow in a warehouse. However, it has specific cons, such as it can increase your taxes.
2. Last In First Out(LIFO)
Here, the recently purchased items are sold out first in a business. It lessens transportation distance because loading and unloading can be done in the same aisle. It even provides tax benefits, especially during inflation.
LIFO can lead to a higher cost of goods sold than any other inventory model, but it can also misinterpret the financial statements. Managing inventories using the LIFO method will be both complex and time-consuming.
3. Weighted Average Method
The weighted average cost is determined by dividing total inventory costs by the total units available.
Let’s discuss an example.
A Company purchased 10 units on January 1 at Rs 100 each, 20 units on January 15 at Rs 120 each, and 15 units at Rs 140 each on January 25.
Total Inventory costs = (10*100)+ (20*120) +(15*140) = Rs5500
Total units = 10+20+15 =45 units
Weighted average method = 5500/45 = Rs122
This inventory method is easy to use and calculate. However, it will not reflect the company’s recent financial environment.
4. Retail Inventory Method
It uses the cost-to-retail ratio to determine the value of ending inventories. This method is beneficial for businesses with large inventories.
5. Lower Of Cost Or Market Value
It states that businesses should compare the original cost of the inventories and their market value and record the price, whichever is lower.
Common Challenges In E-commerce Closing Stock Management
1. Managing Stock During Peak Seasons
A business may struggle to handle stock during holidays or during a particular season or festival. Demand can rise so much that a company cannot fulfil it, negatively impacting customers.
Simultaneously, if you cannot sell many products, you have a lot of leftover stock, which can raise holding costs.
Some solutions exist, like analysing the last sales data and predicting the demand accordingly. You should also choose reliable suppliers and communicate properly so that they will deliver products on time.
2. Handling Returns And Unsold Items
E-commerce businesses have high return rates compared to traditional brick-and-mortar stores. People return the products if they don’t like their colour or quality or receive a damaged product. This can reduce the profit of the business.
However, some solutions exist, like inspecting the product thoroughly during return and trying to resell it if possible. A business can even introduce discounts for return items.
3. Integrating With Multiple Sales Channels
There are multiple B2B platforms where you can sell your products. However, it is challenging to manage the stock. For example, on some platforms, customers can place orders for your products that have already been sold 100% on another platform. In such cases, you need to analyse the sales data of each platform and allocate stock accordingly.
Tools to Simplify Closing Stock Calculations
1. Easycom
It is an inventory management system that helps e-commerce businesses handle multiple tasks, such as order processing and stock valuation, using FIFO or any other inventory model.
This platform even tracks inventories in various warehouses. Easycom is integrated with numerous accounting tools and ecommerce platforms, like Zohobook, Meesho, Flipkart, and Ajio Seller. It automates payments and invoices and reduces human error, helping streamline supply chain operations and enhance customer satisfaction.
2. Tranzact
Tranzact is an automation platform designed for small and medium business people. It tracks stocks in multiple warehouses and entire sales automatically.
The platform can generate and integrate the purchase history with accounting tools like Tally and Zohobook.
Tranzat automates various tasks that reduce errors and increase the speed of multiple processes in the supply chain operations.
Benefits Of Automation Through These Tools
- Calculating stocks manually in various logistics warehouses, preparing purchase reports or making payments to each client or worker individually will take much time and effort. But, automation can speed up all the necessary logistics operations. There is accuracy in various operations of supply chain management.
- Detailed reports through automation can help a business owner to make better decisions.
Conclusion
Monitoring the closing stock is one of the crucial things in an e-commerce business. It provides an accurate financial position of the Company at the end of the accounting period. Managers can make correct decisions on the closing stock report, i.e., whether to reorder products or first sell the stock left over in the warehouse.
AAJ Supply Chain Management
