Inventory is cash sitting on shelves. Too much stock ties up working capital; too little means lost sales and unhappy customers. For Australian SMEs — whether you're in retail, wholesale, manufacturing, or food service — mastering inventory management directly impacts profitability.
1. Cost of Goods Sold (COGS)
COGS is the most important number for any product-based business. It measures the direct cost of producing or purchasing the goods you sold during a period.
Formula: COGS = Opening Stock + Purchases − Closing Stock
- Gross margin: (Revenue − COGS) ÷ Revenue × 100. Healthy benchmarks vary by industry: retail 40–60%, food service 65–75%, wholesale 20–35%.
- Track COGS monthly in Xero using an inventory tracking account or the "Purchases" method.
2. Stock Valuation Methods
| Method | How It Works | Best For |
|---|---|---|
| FIFO (First In, First Out) | Oldest stock is sold first | Perishable goods, food, beauty |
| Weighted Average | Average cost across all units | Bulk commodities, hardware |
| Specific Identification | Each item tracked individually | High-value items (cars, jewellery) |
Choose one method and apply it consistently. Changing methods requires ATO notification and can trigger tax adjustments.
3. The Stocktake
A physical stocktake at 30 June is required for tax purposes. Best practices:
- Count everything: Finished goods, raw materials, work-in-progress, and packaging.
- Value at cost or market value (whichever is lower). Damaged or obsolete stock should be written down.
- Write off dead stock before 30 June to claim the tax deduction.
- Use barcode scanning or a stocktake app to reduce errors and speed up the process.
- Reconcile physical count against your system count — investigate discrepancies (theft, damage, supplier errors).
4. Inventory Software Integration
For SMEs with significant stock, Xero's built-in inventory tracking is basic. Consider add-ons:
- DEAR Inventory (Cin7 Core): Full warehouse management, multi-location, batch tracking. Syncs with Xero.
- TradeGecko (QuickBooks Commerce): Good for wholesale and B2B with multiple warehouses.
- Unleashed: Real-time inventory with manufacturing and BOM (Bill of Materials) support.
5. Key Metrics to Track
- Stock turnover ratio: COGS ÷ Average Inventory. Higher is better — it means stock is selling quickly.
- Days sales of inventory (DSI): 365 ÷ Stock turnover. How many days' worth of stock you're holding.
- Shrinkage rate: (Recorded stock − Physical count) ÷ Recorded stock. Industry average is 1–2%; above 3% needs investigation.
Key Takeaways
- Track COGS monthly — it's the foundation of product business profitability.
- Choose FIFO, weighted average, or specific identification and apply consistently.
- Physical stocktake at 30 June is mandatory — write off dead stock for the deduction.
- Use dedicated inventory software (DEAR, Unleashed) if Xero's built-in tracking isn't enough.
- Monitor stock turnover, DSI, and shrinkage rate to optimise cash flow.