Your inventory reports say you have $200,000 in stock. Your cash account says you spent $300,000 on inventory this year.
If those two numbers don’t make sense together, one of them is wrong. And I can tell you which one it is.
By the end of this post, you’ll know exactly how to check if your inventory numbers are trustworthy, why they’re probably not, and what to do about it this week.
We recently talked to a seller who runs a $5 million ecommerce business. At year end, his accountant told him they needed to adjust his inventory by $300,000! (That’s not a rounding error!)
And here’s what he told us: “I was up until 3am trying to figure out what happened. I just never know if I’m making money.”
Another seller we talked to said it differently: “Inventory feels like a black hole. I pour money in and I have no idea what comes out.”
If that sounds familiar, this post is for you.
Let me show you why inventory numbers are often wrong and how to catch it before it costs you big.
The Problem: Your Reports are Built on Operational Chaos
Because here’s the thing about inventory accounting: It’s different from everything else in your business.
When you buy office supplies, you walk into Office Depot, you buy something, you expense it. Two steps. Done.
When you buy inventory, you’re starting a journey with about twenty fail points between the purchase and your financial reports.
You order from a manufacturer overseas. It ships. It sits at a port. It clears customs. And it gets transported to your 3PL. Your warehouse receives it. Some of it gets damaged in receiving. It sits there for three months. You sell some.
Some gets returned but sits in a different area. Some gets pulled for a marketing event and nobody records it. Some gets bundled into kits. Some expires or becomes obsolete.
Every single one of those steps has a financial impact. And every single one is a place where reality and your reports can drift apart.
Your accountant can’t see any of this. They’re not in your warehouse. They don’t know what got thrown away or damaged or stolen or pulled for samples.
So, your reports are only as good as the information flowing from your operations. And if your operations has gaps, your reports WILL be wrong.
Why It Matters: What You Can’t Do Without Good Numbers
And here’s what happens when your inventory numbers are wrong.
- You can’t make pricing decisions. You think you’re making 60% margins when you’re really only making 30%. So, you drop your prices to compete and now you’re losing money on every sale.
- You can’t decide which products to push. You’re spending ad dollars on products that are actually unprofitable because your costs are wrong.
- You can’t forecast your cash needs. You don’t know how much money is tied up in inventory versus how much is available to spend.
And you definitely can’t answer the most important question: Am I making money?
Here’s the kicker. Your inventory is probably worth more than the cash in your bank account. Most ecommerce businesses are cash poor and inventory rich. All your money is tied up in product.
Now that’s a whole other topic called the cash conversion cycle. We’re not going to go into that here, but to learn more, read Cash Conversion Cycle: The Metric Every Ecommerce Owner Should Understand.
Just remember, if you don’t know the real value of your inventory, you don’t know the most important thing about the health of your business.
The Two Tests That Tell You the Truth
So, how do you know if YOUR numbers are trustworthy? There are two tests you can use.
Test One: The Consistency Check
- Pull up your financials for the last six months.
- Look at your gross margin percentage. (That’s your Sales minus Cost of Goods Sold, divided by Sales.)
What you want to see is consistency.
For instance, Nike’s last five quarters (Q4 2024 to Q4 2025) were: 41%, 42%, 40%, 41%, 44%. Pretty close to a flat line.
Warby Parker’s were: 54%, 54%, 56%, 54%, 55%. A little movement, but tight.
That’s what good inventory accounting looks like.
If your gross margin is jumping around wildly – 40% one month, 60% the next, 30% the month after that – your cost of goods sold calculation is broken.
There might be a good reason. Maybe you did a huge Black Friday sale and margins dropped. Maybe you wrote off damaged inventory. But there should be a story.
If there’s no story, your numbers are wrong.
Test Two: The Year-End Adjustment
At the end of the year (or at any point – just do it!), you should do an inventory count. You compare what you thought you had to what you actually have.
The difference is your adjustment.
If that adjustment is more than 10% of your total inventory value, you have serious operational problems that are creating financial blind spots.
A 10% adjustment on a $1 million inventory balance is $100,000. That’s a massive hit to your profitability that you didn’t see coming.
The goal is to get that number as close to zero as possible.
If you’re consistently off by big numbers, it means inventory is walking out of your warehouse, getting damaged, getting returned and not logged, or being pulled for marketing without anyone tracking it.
The Hidden Problem: Landed Costs
Here’s one more thing that makes your inventory numbers wrong.
Let’s say you buy a product from your manufacturer for $5. That’s your buy cost.
But that product doesn’t magically appear in your warehouse ready to ship.
You pay for:
- Overseas shipping
- Tariffs
- Inland transportation
- Insurance
- Additional packaging
By the time that product is sitting in your warehouse ready to sell, your true cost might be $13. Not $5.
And here’s where it gets tricky. Every time you reorder, those costs can change. Shipping prices spike. Tariffs change. Your order size is different, so the per-unit cost shifts.
If you’re only tracking buy costs in your system, your gross margins are wrong. You think you’re making 80% margins when you’re really only making 40%.
This is why sellers often tell us, “I’m selling more but keeping less.” The numbers don’t reflect reality.
For more information on landed costs, read Understanding Landed Cost: What It Is and How to Calculate It.
The Most Common Reasons Inventory Data Goes Wrong
Let’s recap the most common reasons why inventory data goes wrong, and then we’ll talk about what you can do about it.
As we mentioned before, inventory goes missing. Maybe you’re not tracking damaged goods. Products pulled for marketing events never get recorded. Sometimes it just seems to grow legs and walk off on its own.
Another issue is lost returns. Returns come back to the warehouse, but nobody updates the system.
Untracked stock adjustments can also create problems. Someone pulls a bunch of units for a trade show and forgets to tell anyone.
Duplicate SKUs is a sneaky one. You’re buying under one SKU but selling under different SKUs for each channel. Your systems don’t talk to each other, and this confuses things.
A big culprit is landed costs not being updated. Your buy cost stays the same, but shipping doubled six months ago and nobody changed the product cost in your system.
Spreadsheet breakdowns are common. You’re trying to manage this manually and it only works until it doesn’t.
These aren’t small mistakes. These are profit killers.
What to Do This Week
Okay, here’s what you can do right now to find out if your inventory numbers are trustworthy.
Step One: Run the Consistency Check
Pull your P&L for the last six months. Calculate your gross margin for each month. As a reminder, that’s sales minus COGS, divided by sales.
Write down the percentages.
If they’re all over the place, you’ve got a problem. If they’re consistent within a few percentage points, you’re probably in decent shape.
Step Two: Check Your Top 20 SKUs
You don’t need to count your entire warehouse. Pick your top 20 best-selling SKUs.
Go count them physically. Compare that to what your system says you have.
Calculate the percentage difference. If it’s more than 10%, you have operational gaps that are costing you money.
Step Three: Audit Your Product Costs
Pick your top 10 products by revenue.
For each one, calculate the true landed cost. Take your buy cost and add shipping, tariffs, inland freight, and any other costs to get it into your warehouse.
Compare that to what’s in your accounting system.
If those numbers don’t match, your margins are wrong and you’re making decisions based on bad data.
Do these three things this week. It’ll take you a few hours. And you’ll know exactly where you stand.
Here’s What Changes When You Fix This
- You stop guessing if you’re profitable because now you know one way or the other.
- You can make smart decisions about pricing because you know your true costs.
- You can forecast accurately because your margins are predictable.
- You can get financing or sell your business because your financials make sense to buyers and lenders.
- And you stop staying up until 3am wondering where $300,000 went.
One of our clients told us: “We finally feel good about understanding our financials.”
That’s the goal. Not perfection. Just clarity.
How to Get Help Getting Accurate Reports and Margins
If your inventory reports don’t match reality, the reports are wrong.
But here’s the good news. You’ve already done harder things than this. You’ve built a business. You’ve figured out manufacturing and logistics and marketing across multiple channels.
You can figure this out, too.
Start with those three steps. Run the consistency check. Count your top 20 SKUs. Audit your product costs.
Those three things will tell you if you have a problem and how big it is.
If you find out your numbers are off and you need help fixing them, here are two things you can do:
Find Out Exactly Where Your Inventory Stands Take the Inventory Reality Check. It’s a free 3-minute diagnostic that tells you where your inventory system stands, what’s at risk, and exactly what to fix first. You’ll get instant results plus a personalized action plan sent straight to your inbox. Start Your Free Reality Check →
Need Hands-On Help? If your numbers are off and you need expert support to fix them, LedgerGurus works with 7- and 8-figure ecommerce brands on inventory accounting every day. We’ll help you get the right systems, processes, and reporting in place so you can stop guessing and start scaling. Learn About Our Inventory Services →
