Every manufacturer needs to balance the amount of raw materials on hand, the pipeline of goods in production, and its stockpile of products ready for sale. The trick is to keep your eye on the quantity and value of this last category, known as finished goods. Knowing your finished goods inventory will help you find your company’s sweet spot for on-hand inventory—propping up customer satisfaction and avoiding excessive storage costs.
Let’s dive into finished goods, the benefits of tracking your finished goods inventory, and how to calculate the value of your finished goods.
What are finished goods?
Finished goods are the goods completed in the last stage of the manufacturing process; they are products now ready to be sold to customers. The finished products you see on store shelves are a good example of completed products, though many businesses also hold finished goods inventory in storage as well.
Examples of finished goods include vehicles, clothing, electronics, packaged foods, or anything that’s gone through the entire production process and now is a final product ready for purchase.
Finished goods vs. other inventory
Finished goods are the third and last stage of the manufacturing process:
1. Raw materials. A finished good will almost always begin in the supply chain as raw materials. This could be timber for furniture, metals for electronics, or cotton for clothing.
2. Work-in-progress. When a good is in the process of being manufactured and is only partially completed, it is considered a work-in-progress (WIP).
3. Finished good. When the product is complete and ready to sell on the market, it is then considered a finished good.
What is finished goods inventory?
Finished goods inventory is how many finished goods you have on hand. A company will often have a certain amount of stock or set inventory levels to make sure they don’t run out of goods to sell. Finished goods inventory management is essential to maintain a healthy cash flow and product availability for consumers.
To find out your current finished goods inventory, you can use the finished goods inventory formula. This calculation will provide the dollar value of your current inventory based on the inventory you have in stock and the cost of each product.
How to calculate finished goods inventory
Errors in managing finished goods inventory can turn storage costs into your biggest expense. If you want to determine your finished goods inventory, you can use inventory management software to do the calculations for you. If you prefer the old-fashioned way, you can also use manual calculations to find your inventory value. The formula to calculate your finished good inventory (FGI) is as follows:
FGI = COGM – COGS + previous FGI
Let’s break down each of these items:
- COGM. Cost of goods manufactured (COGM) is the total production costs for all finished goods currently in stock and goods already sold. This amount considers production costs like raw materials and labor costs but not distribution or sales costs. This number should also account for WIP inventory, or goods in production for eventual sale.
- COGS. The cost of goods sold (COGS) is the total amount it costs to produce finished goods sold in the designated accounting period (not including the goods currently in stock). Just like COGM, this number should only consider production costs like raw materials and labor.
- Previous FGI. Your previous year’s finished goods inventory value is the value of unsold goods from before the designated period you’ve chosen for your calculations. This figure should be a dollar value and will ensure that you’ve accounted for products from previous accounting periods.
Here’s how you calculate it:
1. Determine the time frame. For consistency and accuracy, work with the same time period—whether it’s a month, financial quarter, or year—in all of your calculations.
2. Determine the cost of goods manufactured. You can find your cost of goods manufactured from entries on your company’s balance sheet. This number will be a dollar amount. Learn more about how to calculate your COGM with Shopify’s guide.
3. Determine the cost of goods sold. Similar to COGS, this number is found on your company’s balance sheet in the form of a dollar value. Learn more about how to calculate your COGS with Shopify’s guide.
4. Include previous FGI, if applicable. If your business is new or this is your first time selling and tracking a specific product, this number won’t be necessary for your calculations. Otherwise, find your previous FGI on your company’s balance sheet.
5. Subtract COGS from COGM, then add previous FGI. Plug your numbers into the finished goods inventory formula and you will get a number expressed as a dollar value. This is the current value of your finished goods inventory.
Why is finished goods inventory important?
Knowing your finished goods’ value is fundamental for inventory management and for ensuring that the balance sheet in your current accounting period is updated. Being able to record finished goods inventory in your financial statements will help you keep finished goods at optimal levels so you never run out or have too much. Here’s why tracking finished goods is important:
Anticipate and fulfill sudden orders
Don’t get caught turning away large or sudden orders because you’re out of stock. Keeping track of your finished goods will help you manage your inventory turnover rate, which is how often you sell out and should restock products so you can keep up with customer demand and prevent stockouts.
Avoid excess storage fees
There’s only so much product you can have on the sales floor or in the back room at any moment. If your stock levels are too high, you’ll find yourself paying holding costs for additional storage—recurring payments that can hurt your bottom line.
Reduce obsolete or expired goods
As your products sit unsold, they risk losing value if customer demand decreases, consumer tastes and fashions change, and the products no longer sell. Tracking finished goods inventory is just one piece of necessary data to help you decide when to produce finished goods to meet customer demand.
Finished goods FAQ
What are examples of finished goods in accounting?
In accounting, finished goods are any current asset that is no longer a raw material or a work in process—in other words, something that is ready for sale. The finished goods formula is an accounting method to determine the value of a company’s current stock and keep financial statements like a company’s balance sheet updated.
What is the best example of a finished goods inventory?
An example of a company’s finished goods inventory would be a clothing store’s inventory of jeans, including how many are on the storeroom shelves ready for sale and how many are in storage.
What is the formula for calculating finished goods inventory?
The formula for calculating finished goods inventory is:
FGI = COGM – COGS + previous FGI
FGI is the current finished goods inventory, COGM is the cost of goods manufactured, COGS is the cost of goods sold, and previous FGI is the value of the finished goods inventory from past accounting periods.
