Did you know that within five years of opening the first Walmart, Sam Walton was making over $12 million per year? And that was in the 1960s! Adjusted for inflation, that would equate to roughly $90 million per year. In reality, Walmart makes over $400 billion per year now. Yes, billion, with a 'b.'
How did Walton create the most successful retail chain in history? One of the biggest contributors to his success was a state-of-the-art inventory control system. Walton knew that keeping high-demand products in stock meant more sales, while having too much inventory meant losing money to storage costs, spoilage and potentially waning demand. As a result, Walmart became the first major retail chain to implement an electronic point of sale system linked to a centralized inventory database. The result was increased profits, decreased costs and a database that’s second only to the Pentagon’s in capacity.
What is inventory management?
It’s the organization and tracking of all inventory, from the moment you order it to the moment you hand it off to the customer. It involves tracking orders, forecasting demand, pricing products competitively and a lot more.
Why should I track my inventory?
So that you can become a bajillionaire like the Waltons! But really, it’s important to track inventory so that you don’t end up with a warehouse full of unsellable product. Or run out of your most profitable item during peak selling season.
You should be tracking what you’ve purchased that you’re waiting to receive, what you have in stock, what you need to buy, what’s been sold and what’s been sent out to customers. You should also be tracking COGS.
What is COGS?
COGS stands for Crazy Old Googly Snakes. What? No, it doesn’t. It actually stands for Cost of Goods Sold. It includes the cost of your merchandise and related supplies as well as packaging, shipping, labor, storage, and all the other costs that go into getting the product into your inventory and ready for sale.
For example, if your company sells bow ties for cats, you might spend $5 on materials like fabric and thread, $3 on labor to make the bow tie and $2 on packaging and shipping once the product sells. Your total COGS would be $10.
The cost of goods sold is often one of the largest expenses for companies. Expenses reduce your business income, and thus your taxes. That’s yet another way a proper inventory management system can reduce your costs.
How do I calculate my COGS at the end of the year for my taxes?
You need to know four things:
- Your beginning inventory amount – This should be the same as your ending inventory amount from last year or zero if you started the business this year
- Additional inventory costs – All inventory purchased during the year along with the associated COGS expenses
- Your inventory valuation method – There are many different methods, but the cost method (which is the same as calculating COGS) is the simplest
- Ending inventory amount – If using the cost method, this is simply the cost of all inventory you still have on hand at the end of the year
Setting up a system that keeps track of your inventory and the associated expenses can be difficult initially. But once you have it in place, it will not only save you money but also make your other administrative tasks much easier.
Keep in mind that if your business does less than $1 million in sales per year, the IRS doesn’t require you to report your inventory or COGS. But it’s a good idea to start practicing now so you’re ready when you become a multi-billionaire.
If you need help setting up your inventory system or calculating your COGS, get in touch. We specialize in helping eBay and Amazon sellers set up their businesses correctly from the start, which includes everything from managing inventory to paying sales taxes to filing all the necessary forms with the IRS. Contact us today for a consultation.