inventory management
How to Do a Year End Inventory Count as a Small Business
Wondering how to count and value your inventory at end of year? We guide you through the calculations and steps you need to take.
Pat yourself on the back. You’ve just gotten through another busy season of stock flying out the door.
Before you put your feet up, you’ll want to remind yourself that it’s now time to do a year-end physical inventory count. If this takes the spring out of your step and bursts your bubble, you aren’t alone! Year-end stock counts are tedious endeavours and ones that can send your entire business to a complete standstill (that is, if you are doing it wrong).
This guide will explain why end-of-year inventory counts are important, and how you can undertake your stock count (or cycle count). Along the way, we’ll introduce some tools and techniques you can use to make these inventory tasks much faster and less stress-inducing in the future.
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What is a year-end inventory count?
A year-end inventory count is a physical stocktake performed at the close of your fiscal year to measure how much stock and raw materials you have on hand and their total dollar value.
Let’s start by defining what we mean by undertaking an end-of-year inventory count.
At the end of each accounting / financial year, an inventory count is usually taken by a business with inventory to determine three things:
a) how much available, unsold product stock they have on hand;
b) how much raw materials they currently have on hand (if they make products in-house) and;
c) the current value of all stock they have in their possession (aka your inventory valuation).
For resale product businesses, this usually involves counting only products on hand that you haven’t yet sent to your customers.
For in-house manufacturing businesses, an end-of-year count will include both finished products, sub-assemblies, and raw materials yet to be used. This makes it a much more complex task to undertake.
Depending on how you track your stock, it may be necessary to pause all operations while this end-of-year stocktake is carried out (although, as you will find later in this article, it’s not always the case).
Exactly how you go about each of these tasks depends on how you manage your inventory and calculate unit costs, which we will explain along the way.
Why is it important to do an end-of-year inventory count?
An accurate end-of-year inventory count is legally required for most makers who manufacture from raw materials and is essential for calculating your COGS and tax obligations correctly.
Before we dig into the ways you can do your end-of-year count, let’s take a moment to look at the reasons why it is important, particularly for small businesses.
1. To better understand your inventory situation
An end-of-year inventory count allows you to accurately and definitively measure your stock levels. You don’t need to guess your available stock when you have a solid number to work from.
This also means you can now see if you are under or overstocked and can take the necessary steps to either restock or sell off any excess inventory.
2. To forecast your needs for next year
Understanding your stock situation also allows you to calculate how much stock you have sold throughout the year. This gives you a better understanding of your business’s performance so you can forecast demand for next year.
3. Because…taxes
End-of-year inventory counts are also performed, often quite reluctantly, because the tax authorities require this information. For sole proprietors in the US, this is reported as Part III of your Schedule C form, whereas for corporations, it’s usually reported on your Form 1125-A: Cost of Goods Sold. And if you’re wondering whether this requirement applies to your small business: yes, it does. The IRS doesn’t grant exemptions based on size for makers who manufacture from raw materials. Our guide covers exactly what IRS Publication 334 says about inventory requirements.
How to perform your stock count
Let’s take a look at the how of running your end-of-year inventory stock count. There are effectively two methods available to small businesses: the full periodic stock count or the inventory cycle count (or both).
Periodic year-end counting
A year-end periodic inventory count involves a full, comprehensive count of all of the items in your warehouse.
This is usually done once annually and helps to provide an overall snapshot of what products are on hand, how many units there are, and their respective values.
This count requires you to stop everything in your business and attend to it. You need a static number to count, and that simply isn’t possible if warehouse staff are running around at the same time picking and packing stock.
Cycle counting
An inventory cycle count is a smaller, more frequent form of inventory counting.
It usually involves counting a certain number or type of items on a regular basis: weekly, monthly, or quarterly, depending on whatever cadence suits your operations. This allows you to keep track of your stock levels and make sure they are accurate throughout the year.
Cycle counts can theoretically be done manually with inventory systems as simple as paper and pen, however they work best when a company is using an automated system to count inventory, ideally one that uses perpetual inventory tracking principles.
This is because you need to make sure the items you select for counting represent your entire inventory, rather than choosing items randomly.
There are a couple of different ways you can go about choosing your cycle count sample, including standardised random sampling and ABC analysis. Most good perpetual inventory systems will calculate your sample automatically and present this to you on the schedule of your choosing.
Read more: How to do a Cycle Count
What’s the difference between year-end inventory and an inventory cycle count?
Year-end inventory counts all stock in a single period; cycle counts audit smaller groups on a regular schedule throughout the year without requiring you to stop operations.
To summarise: year-end periodic inventory counts typically provide more detailed information than cycle counts, as all stock is counted in a single time window. Cycle counts only require small groups of stock to count, so they are much easier to factor into small operations with no need to shut down completely.
As you can see, how you undertake your end-of-year count is very much dependent on how you wish to track your stock levels and your production team’s capabilities.
Your End-of-Year Inventory Checklist
Before you sit down to calculate values and fill out tax forms, run through this quick checklist first. It takes about 30 minutes and saves a lot of back-and-forth later.
- Freeze production and sales activity (if using periodic counting). You need a static snapshot, not a moving target. If you use perpetual tracking software, you can skip this step.
- Count all raw materials on hand. Every material, component, and supply in your workspace. Don’t forget partial rolls of ribbon, half-used bags of wax, or materials stored off-site.
- Count all finished goods. Products finished but not yet shipped or sold. Check every shelf, bin location, and storage area.
- Reconcile physical counts against your records. Compare what you counted to what your software (or spreadsheet) shows. Flag any discrepancies larger than expected tolerances.
- Record the ending inventory date. Your count must reflect December 31 stock levels. If you count in early January, make adjustments for any transactions between December 31 and your count date.
- Back up all records. Export a CSV or PDF snapshot from your inventory software dated December 31. Keep it alongside your tax records.
- Pull your Schedule C figures. Note your beginning inventory (last year’s ending inventory), net purchases, and your ending inventory value. These are the three inputs for Part III of Schedule C.
The goal is to have a number you can defend if you’re ever audited. A clean physical count plus a software backup is the best combination you can have.
How to Calculate your Ending Inventory Value
Just as how you do your actual physical count can differ, so too can the way you calculate your inventory value. This is the figure you will need on your tax return, so it’s wise to make sure you get this right.
Your Ending Inventory Value is the value of your raw materials and the unsold product you have on hand at the end of the year (December 31), calculated using this formula:
Ending Inventory = Beginning Inventory + Net Purchases - COGS
Beginning Inventory is your end-of-year figure from last year, and net purchases is the total value of all materials and products you have bought over the financial year.
Your COGS figure can be calculated in a couple of different ways, which we’ll describe briefly below (for a more in-depth COGS guide, see: How do I calculate COGS?)
FIFO and LIFO: What You Should Know
FIFO and LIFO have long been used as standard ways of valuing inventory. It’s worth knowing the current landscape before you choose either, though.
FIFO (First In, First Out) assumes the stock you purchased earliest is sold first. Your ending inventory is valued at the most recent purchase prices, which tends to give a more current picture of your stock value.
LIFO (Last In, First Out) assumes the most recently purchased stock is sold first, leaving older (often lower-cost) stock in your ending inventory figure. LIFO can lower taxable income in inflationary periods, which is why it exists, but it comes with significant limitations:
- LIFO is banned under IFRS, which means it cannot be used in most countries outside the US (including Australia, Canada, and the UK). If you have international customers, advisers, or plan to ever seek outside investment, this matters.
- Even within the US, LIFO adds considerable administrative overhead with little benefit at small scale.
- The IRS requires you to maintain a LIFO reserve and file Form 970 to elect LIFO. That is not a light undertaking for a solo maker.
For the vast majority of small handmade business owners, the average cost method (described below) is the most practical choice. It’s also what most inventory software, including Craftybase, uses by default.
Average Cost Method
The Average Cost Method (also called weighted average cost) calculates your ending inventory value using a blended cost per unit across all purchase lots during the year.
This method smooths out material price fluctuations over time, which is particularly useful if you buy your materials in batches at varying prices. It’s more accurate than trying to track individual purchase lots, less administratively burdensome than LIFO, and it’s what Craftybase calculates automatically whenever you log a material purchase or produce a batch.
Read more:
- What is the Average Weighted Cost Method?
- FIFO, LIFO or Average Cost: Which Inventory Valuation Method is Best?
Individual Costed Method
In this method, the cost of each item sold over the fiscal year is calculated independently. This method is typically only used for large ticket items, or for small businesses that make a majority of custom items. It isn’t easy to track and calculate if you have a large product range and/or a large volume of orders.
How Craftybase Makes Your End-of-Year Inventory Count Easier
For small operations, it’s completely fine to track your inventory using spreadsheets. But once you’re buying materials regularly, running production batches, and selling across channels, the manual work quickly becomes unmanageable. This is where perpetual inventory software changes the picture.
Craftybase is purpose-built for makers who manufacture from raw materials. Here’s how the specific features map to the year-end tasks above:
Stocktaking. Craftybase has a built-in stocktake feature that lets you record a physical count and automatically reconcile discrepancies against your perpetual records. You don’t need to export to a spreadsheet and compare rows manually; the reconciliation happens in the app.
Location tracking. If you store materials or finished goods in multiple bin locations (a shelf, a storage unit, a second workspace), Craftybase tracks inventory by location. Your year-end count can be done location by location, and the software aggregates the totals automatically.
Average cost auto-calculation. Every time you log a material purchase or run a production batch, Craftybase recalculates your weighted average cost per unit in the background. By December 31, your ending inventory value is already calculated with no formula required.
One-click EOY report. Pull your Schedule C Part III figures directly from the app: beginning inventory, net purchases, COGS, and ending inventory. The figures are formatted for direct entry into your tax return without any additional calculation.
Using Craftybase’s inventory software, you’ll be able to log your material purchases, production runs, and orders to generate real-time stock levels for both raw and finished product inventory. Year-round, not just in December.
Give our free 14-day trial a spin, to see how we can make your December as stress-free as possible.
Frequently Asked Questions
What is beginning inventory on Schedule C?
Beginning inventory is the total value of raw materials and unsold finished products you had on hand at the start of your fiscal year (typically January 1). For your first year in business, beginning inventory is zero. In every subsequent year, it equals the ending inventory figure carried forward from the prior year's Schedule C Part III, line 35.
What is ending inventory on Schedule C, and how do I calculate it?
Ending inventory is the value of all unsold products and unused raw materials you hold at December 31, reported on Schedule C Part III, line 41. It is calculated as: Beginning Inventory + Net Purchases − Cost of Goods Sold. This figure becomes next year's beginning inventory, so accuracy matters for two consecutive tax years. Getting it wrong compounds over time.
Do I need to report inventory on Schedule C if I'm a small handmade business?
Yes. If you produce goods from raw materials, the IRS requires you to report beginning and ending inventory on Schedule C Part III, regardless of revenue. IRS Publication 334 covers inventory requirements for sole proprietors. The cost of goods sold calculation in Part III directly reduces your taxable income, making accurate inventory tracking essential for any maker selling handmade products.
What inventory valuation method should I use for Schedule C?
The IRS accepts FIFO, LIFO, and the average cost method for Schedule C filers. Most small handmade business owners find the average cost method the most practical because it smooths out material price fluctuations over time and is the approach used automatically by Craftybase. LIFO is banned under IFRS (meaning it cannot be used in most countries outside the US) and adds complexity with little benefit at small scale. Most makers are better off with average cost or FIFO.
How does Craftybase help with my end-of-year inventory count?
Craftybase uses perpetual inventory tracking to maintain real-time stock levels for raw materials and finished products throughout the year, so your ending inventory value is available at a click on December 31. Built-in stocktaking lets you reconcile physical counts against your records directly in the app. It calculates COGS automatically using the average cost method and generates the Schedule C Part III figures (beginning inventory, net purchases, COGS, and ending inventory) without any manual calculations.
