The Importance of Completing a Physical Year End Inventory

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As the calendar year is nearing the end, it’s time to start thinking about year end tasks, your bookkeeping, and taxes (yay!). One task that can often be overlooked is completing a PHYSICAL year end inventory. What exactly does that mean?

It means actually going through your store/storage space and making note of EVERY single item you have on hand – along with the COST (ie. what YOU paid, not the retail value) of each item. 

Yes, it can be a big task, but it’s extremely important that you add this to you to-do list around January 1st, and here’s why…

You need a year-end inventory count for your income taxes 

Your cost of goods sold is likely going to be one of your largest deductions that you get to claim on your tax return. But, this number is actually determined by a formula:

Cost of Goods Sold = Beginning Inventory (taken last January 1st) + Purchases – Ending Inventory (taken this January 1st)

In order for your cost of goods sold calculation to be accurate, and so you can get the biggest deduction possible, it’s important that you actually PHYSICALLY count all the items, instead of relying on what your point of sale system SAYS you have on hand. Speaking of that…

You can’t blindly trust what your point of sale system reports as your year end inventory

There’s a number of reasons why your point of sale system might be incorrect, so it’s important that you don’t just believe that number to be true. It may be off because of theft, damages, or returns that weren’t logged correctly. 

Doing a physical year end inventory account will allow you to adjust what your point of sale system reports as your ending inventory down to what you ACTUALLY have in your store. 

A lower ending inventory = a higher cost of goods sold deduction = paying less in taxes! So, make sure you add that physical year end inventory count to your to-do list! 

How to make your year-end inventory easier

Alright, so now that you know why it’s important, let’s talk about the how. Here are some tips to make the process smooth, and maybe even a little enjoyable:

1. Schedule it now & communicate that you’ll be closed
   I recommend scheduling it for January 1st, or as close to that day as you can. Announce it to your customers that you will be closed for the day (or two days, depending on how much inventory you have to count), so they know what to expect..
2. Get Help
   Don’t go it alone! Rope in your team, or even a few friends or family members, to help count. Many hands make light work.
3. Stay Organized
   Before you start, be sure to clearly communicate with your team/friends how you’re going to approach it. Are you dividing the store up by categories? By walls? Make sure everyone knows their assignments.
4. Update Shopify and Your Bookeeping
   Once you have the final numbers, update your Shopify (or whatever point of sale system you use) and make sure your books reflect the correct inventory value. 

So what’s next?

Once your inventory is up to date, take a moment to review it. Look at what’s selling, what’s not, and what you might need to restock. You can also use this opportunity where your store is closed to “refresh” your layout a bit, and maybe move some of the slow moving inventory to a place in your store that has higher traffic to help you get it out of there.

A clean inventory and bookkeeping records sets the foundation for a cleaner, healthier business. Plus, it gives you peace of mind knowing your numbers are accurate and you’re starting the year on the right foot.

If you’re looking to have more confidence in your own bookkeeping abilities heading into the new year, then I’d love to invite you to watch my free training on the Bookkeeping Basics: What you Need to Know to DIY Your Boutique Bookkeeping.

Here’s to finding your own version of freedom,