Key Performance Indicators (KPIs) are the metrics used to measure the performance of a business. Similarly, ecommerce metrics are the KPIs that can help online businesses evaluate their performance, set benchmarks, and take corrective measures to steer the business in the right direction.

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In this ecommerce metric refresher, you will learn what is closing stock, how to calculate closing stock, why businesses should calculate closing stock, the benefits of decreasing closing stock, and the strategies to decrease closing stock.

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What is closing stock?

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Closing stock is an ecommerce metric that refers to the unsold inventory with a seller at any given time period. Closing stock can be calculated for any time period (monthly, quarterly, half-yearly, yearly) and is also referred to as ending inventory or closing inventory.

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The following illustration shows the closing stock formula:

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Let's see how to calculate closing stock with an example,

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The value of your beginning inventory at the start of the quarter= Rs.2,00,000

Inventory purchased over the course of the quarter= Rs.1,50,000

Cost of Goods Sold (COGS)= Rs.1,70,000

Therefore, Closing stock = 2,00,000 + 1,50,000- 1,70,000= Rs.1,80,000

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Note: The lower your closing stock, the higher your sales for that time period. Also, a lower closing stock will allow you to stock up on fresher inventory and reduce the chances of it becoming obsolete.

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What are the methods of calculating closing stock?

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The simplest way to calculate closing stock is to do a physical inventory count. However, manually counting inventory can be cumbersome for ecommerce sellers maintaining high levels of inventory in multiple ecommerce warehouses. You can use specific formulas to calculate closing stock easily.

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It is advisable to choose one method of calculating closing stock and use it consistently to ensure minimum discrepancies. Let’s have a look at how closing stock can be calculated:

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1. First In First Out (FIFO)

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The first method of calculating closing stock is FIFO; herein, it is assumed that the inventory is sold in the order in which it was obtained. In FIFO, inventory bought first is sold first; thus, older inventory is counted in the Cost of Goods Sold (COGS), and newer inventory becomes the closing stock.

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2. Last In First Out (LIFO)

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In this method, inventory that is acquired later is sold first. The LIFO is prominently used in the case of perishable inventory. Herein, the earlier inventory becomes the closing stock, and the later inventory is calculated as COGS.

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3. Weighted Average Cost (WAC)

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The Weighted Average Cost (WAC) method divides the total cost of acquiring all inventory (earlier or later) by the total number of items. This gives an average of the cost of inventory acquired. The WAC method is a highly straightforward and beneficial method for ecommerce brands selling identical products.

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Why should businesses calculate closing stock?

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All ecommerce sellers would want to know how much inventory they could sell or not, and closing stock is how they can do so. Ecommerce businesses should calculate closing stock for the following reasons:

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• It helps match recorded inventory levels with actual inventory levels to ensure there is no accounting error, theft, or inventory loss.
• Closing stock aids in forecasting and planning, such as calculating the prices of products.
• Useful in calculating required inventory levels to prevent stock-outs or excess stock situations.
• Helps calculate the net income generated during a given accounting period.

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Benefits of decreasing closing stock

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1. Higher sales

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A lower amount of closing stock means that you could sell more and generate more revenue during a given time period.

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2. Lower operational costs

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By decreasing closing stock, ecommerce sellers can reduce the costs of maintaining and storing inventory. Moreover, you would need less labour to handle the inventory.

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3. Lesser obsolete inventory and waste

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If your closing stock is low, you can purchase or manufacture fresher inventory, thus reducing the chances of inventory becoming obsolete. Moreover, unused inventory can become waste.

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How to reduce closing stock?

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Here are some strategies you can use to reduce closing stock:

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1. Calculate consumer demand

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Forecasting consumer demand can give you an idea about the appropriate amount of inventory you should order. This helps you stock up on inventory such that inventory is not so high that it becomes obsolete and not so low that you cannot fulfil orders on time. Ecommerce sellers can use historical sales data and Inventory Management Systems (IMS) to calculate consumer demand.

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2. Automate replenishment

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Maintaining sufficient inventory levels is a must for ecommerce sellers, and for that, automating inventory replenishment is key. Automating your replenishment processes can help you order inventory at the right time because if ordered too early, it becomes outdated, and if ordered too late, orders cannot be processed on time. Automation also helps reduce errors and maximise efficiency.

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3. Sell on multiple sales channels

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By selling on multiple sales channels like Amazon, Flipkart, and Meesho, ecommerce brands can tap into a wider customer base. Thus, increasing sales, conversion rates, product visibility, and sales velocity.

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4. Use strategies to boost sales

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Ecommerce sellers can take steps to boost ecommerce sales as more sales mean lower closing stock. Some strategies to boost sales are:

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• Build brand awareness
• Run advertisements
• Run promotional and flash sales
• Have an easy and stress-free returns policy
• Reduce shopping cart abandonment by having an easy checkout process, offering multiple payment methods and more
• Increase Average Order Value (AOV) using kitting
• Provide free and fast shipping

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Bottom line

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Inventory is an important asset for ecommerce businesses, but if left unsold for too long, it can become a burden. Closing stock is a critical inventory metric that can help ecommerce sellers maintain optimum inventory levels and avoid the risk of stock-outs or excess stock to maximise operational efficiency.