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Inventory On Hand Formula: The Ultimate Guide in 2024

3 Minutes

In this article, we will explore what the inventory on hand formula is and its importance. We also cover how to apply the formula using an example. Read on to learn more. 

inventory on hand formula

What is the Inventory On Hand Formula?

The inventory on hand formula calculates the current amount of inventory available by adding purchased or manufactured inventory to the beginning inventory and then subtracting the sold inventory.

The basic formula to calculate inventory on hand is:

Inventory on Hand = Beginning Inventory + Purchased Inventory − Sold Inventory

Where:

  • Beginning Inventory is the amount of inventory you have at the start of a specific period.
  • Purchased Inventory is the additional inventory you purchased or manufactured during the period.
  • Sold Inventory is the amount of inventory that has been sold during the period.

This formula can be expanded or adapted depending on the specifics of a business’s operations and what exactly it wants to track. There may be additional factors to consider like inventory damaged, lost, or returned. Conducting a physical inventory count periodically to ensure that your records are accurate can also be helpful.

what is inventory on hand formula
Source: knic.co.id

How to Apply the Inventory On Hand Formula

Here are our steps to apply the inventory on hand formula:

Step 1. Gather Data:

Collect necessary data, including the Beginning Inventory, Purchased Inventory, and Sold Inventory.

  • Beginning Inventory: Retrieve the number of units recorded in the inventory management system at the start of a specific period.
  • Purchased Inventory: Record the number of units added to the inventory during the period.
  • Sold Inventory: Track the number of units sold during the period.

Step 2. Apply the Formula:

The formula for inventory on hand is given as:

Inventory on Hand = Beginning Inventory + Purchased Inventory − Sold Inventory

Step 3. Perform the Calculation:

For instance,

Beginning Inventory: 150 units

Purchased Inventory: 50 units

Sold Inventory: 40 units

Plug these values into the formula:

Inventory on Hand = 150 + 50 - 40 

Inventory on Hand = 160 units

Step 4. Analysis and Interpretation:

With 160 units of inventory on hand, analyze how this aligns with the business sales forecasts, storage capacity, and inventory turnover goals. Determine whether adjustments are needed in ordering or sales strategies to optimize stock levels and minimize holding costs.

inventory on hand
Source: nerdwallet.com

Example

EcoBags started the month with an initial inventory of 500 bags. During the month, they manufactured an additional 300 bags and sold 350 bags. Here’s how they applied the inventory on hand formula to determine their ending inventory for the month.

Step 1. Gather Data:

For the company EcoBags, the data are as follows:

  • Beginning Inventory: 500 bags
  • Purchased/Manufactured Inventory: 300 bags
  • Sold Inventory: 350 bags

Step 2. Apply the Formula:

The inventory on hand formula is given as:

 

Inventory on Hand = Beginning Inventory + Purchased Inventory − Sold Inventory

Step 3. Perform the Calculation:

Plugging in the values:

Inventory on Hand = 500 bags + 300 bags − 350 bags

Inventory on Hand = 450 bags

Step 4. Analysis and Interpretation:

EcoBags now has 450 bags left in inventory. The management should assess if this remaining inventory is sufficient to meet the demand until the next batch of bags is manufactured or purchased. They should consider their sales forecasts, upcoming marketing promotions, or any seasonal demand fluctuations to ensure that they neither overstock nor run out of inventory.

what is the inventory on hand formula
Source: dclcorp.com

Importance of the Inventory On Hand Formula

Calculating inventory on hand is important for a number of reasons. Some of the most common reasons include: 

1. Demand Fulfillment:

The inventory on hand formula helps businesses ensure adequate stock levels to meet customer demands, prevent stockouts or overstocking, and enhance customer satisfaction.

2. Cost Management:

By tracking inventory on hand, companies can optimize their inventory levels, reducing the costs associated with holding excess inventory and minimizing storage, insurance, and other carrying costs.

3. Cash Flow Optimization:

Accurate insight into on-hand inventory supports better cash flow management as businesses can make informed decisions about restocking, utilizing resources efficiently, and investing in other operational areas.

4. Operational Efficiency:

The formula aids in streamlining warehouse and supply chain operations. This enables businesses to plan efficiently for storage space, staff allocation, and logistic requirements which ultimately improves overall operational efficiency.

We hope that you now have a better understanding of what the inventory on hand formula is and how to calculate it. 

If you enjoyed this article, you might also like our article on the inventory accuracy formula or our article on the inventory cycle formula.

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