Accurate stock records can transform the way a business operates. In the 2025/26 tax year, many UK owner-managed businesses will face tighter margins due to increasing expenses and a corporation tax rate of 25% on profits above £250,000. When stock levels are unreliable, owners risk affecting their cost of goods sold (COGS), missing potential tax efficiencies and losing sight of their bottom line. We have seen how proper tracking of inventory management boosts cashflow and shields businesses from sudden surprises, whether they work in construction, manufacturing, hospitality, e-commerce or other fields.
What is COGS and why does it matter?
COGS covers all direct costs tied to producing or purchasing goods for sale. This includes raw materials, direct labour and any other expenses directly related to bringing products to market. When you track your stock with care, you feed accurate figures into the COGS calculation. That data informs your gross profit and shows how well you manage your resources. If your books show an inflated figure for goods on hand, you risk understating the real COGS. Understated COGS can lead to higher profit figures on paper, which may mean a steeper tax bill.
The opposite is also true: overstated COGS can limit the business’s growth by hiding the real profit level and prompting misguided decisions.
COGS links closely to gross margin, so it shapes your pricing, spending and sales approaches. During 2025/26, businesses with profits below £50,000 might still pay 19% corporation tax, but as soon as you move into higher thresholds, that rate heads toward 25%. Every small percentage change in gross margin can shift your tax responsibility and overall profit in ways you feel at year-end. Clear stock records can make the difference between smooth expansion and year-end headaches.
Key inventory management methods
Different businesses use different methods to value stock and calculate COGS. These are the most common approaches.
- FIFO (first in, first out): This method treats the earliest purchased or produced items as the first sold. Businesses often prefer FIFO when their oldest stock moves off the shelves first. It can align well with actual stock flow, especially for perishable or time-sensitive goods.
- LIFO (last in, first out): LIFO presumes the newest stock leaves first. While it can lower reported profit during periods of rising prices (because newer, higher-cost items are “sold” first), it is not always allowed under certain accounting standards. For many UK companies, LIFO might only be used for internal tracking.
- Weighted average: Under this method, you calculate an average cost of all goods in stock, which updates each time you buy more. Businesses that handle large volumes of similar items often find weighted average simplifies their record-keeping.
Each method affects COGS. If you pick FIFO, COGS might appear lower when prices rise. If you choose LIFO, you might show higher COGS (though UK reporting can limit LIFO in statutory accounts). Weighted average spreads costs in a balanced way, avoiding big swings.
The risks of poor tracking
Inconsistent inventory management and stock records throw off your financial statements. According to a 2024 report from the Office for National Statistics, around 40% of small and medium enterprises faced profit squeezes because of inaccurate stock data. Some of these businesses underestimated the value of their goods, which triggered irregularities during audits. Others overestimated items they had on hand, leading to wastage or delayed re-orders.
Poor records also skew decisions on pricing and purchasing. If you think you have plenty of materials in the warehouse, you might miss a chance to buy at a lower cost or avoid a rush order. On the other hand, if your records show less stock than you hold in reality, you could end up purchasing too much. For seasonal ventures, especially in fields like hospitality or retail, such errors can lead to stockpiles of unsold items or shortages at peak times.
Compliance is another factor. If your records fail to align with official guidelines, you may invite scrutiny from HM Revenue & Customs (HMRC). You need to stay consistent with accepted accounting practices. For further details on valuing stock for tax purposes, visit the HMRC official guidance.
Role of technology in tracking
Many of our clients in construction, manufacturing and e-commerce already rely on specialised software to keep tabs on their stock. Automated tools track goods from purchase to sale, prompting reorders, updating stock levels and sending alerts when something seems off with their inventory management. This approach saves time, prevents human error and streamlines the process of drawing up management accounts.
Modern software tools typically integrate with popular accounting platforms, which means each sale automatically adjusts stock figures and updates your COGS. If you sync your point-of-sale system with real-time stock levels, you minimise mistakes. Automated processes help you spot variances and highlight items that may be nearing expiry or are slow-moving.
Why it matters for the 2025/26 tax year
As we move into the 2025/26 tax year, many allowances and thresholds remain under review. The corporation tax rate stands at 25% for businesses earning above £250,000 in profit, with a tapered range for those earning between £50,000 and £250,000. If your gross profit is overstated due to incomplete records, you could face a bigger tax bill than necessary. UK startups and small companies are especially sensitive to shifts in profit margins, and tax relief schemes can evaporate if your profits exceed certain thresholds.
Because COGS directly affects profit, stock valuation can be a hidden factor in whether you move into a higher tax band. We encourage clients to keep inventory managment methods up to date, especially if you expand your product lines or see material cost changes. If your supplier prices fluctuate, weighted average might give a more stable view. If you deal with products that go out of date, FIFO could reflect their actual flow. LIFO might be an internal approach if you track items with longer shelf lives and want to measure cost changes more closely, though you need to confirm whether it meets official reporting rules.
Stock control for different industries
- Construction: Some construction firms hold extensive material stock. If you operate multiple sites, you might lose track of bricks, timber or steel stored in separate locations. When you use a tracking system, you reduce wasted materials and avoid over-ordering.
- Manufacturing: A manufacturer might hold raw materials, semi-finished products and finished goods. If the stock control system is off, managers might run short on key components or hold extra items that never go into production.
- Hospitality: Restaurants, pubs and hotels often have a high turnover of perishable goods. Without a clear stock record, you risk spoilage and missed sales. FIFO tracking is standard in many kitchens because of the short shelf life of fresh ingredients.
- e-commerce: Online retailers often run tight shipping operations and rely on warehouses or fulfilment centres. A single glitch in your system can lead to overselling items you do not actually have, which harms customer satisfaction.
- Startups: Early-stage businesses need to stretch every pound. A small spike in wasted goods or late orders can hurt a startup’s chances of scaling up. Good stock controls lay the groundwork for future expansion.
Practical tips for better stock and inventory management
- Review your system regularly: Do a regular count to check your records. A monthly or quarterly schedule keeps your books accurate.
- Use software with real-time tracking: By keeping everything from purchase orders to sales updates in one place, you reduce the risk of missing data.
- Pick the right valuation method: Decide if FIFO, LIFO or weighted average suits your business type. We are happy to help you choose the best fit.
- Stay on top of reorders: Automated reorder alerts help avoid stockouts and let you strike better deals with suppliers.
- Monitor slow-moving or obsolete items: Identify goods that no longer sell quickly, so you can adjust pricing or promotion strategies.
How we can help
At James Scott, we focus on owner-managed businesses across several sectors. We believe that solid records free your energy for growth. Clear stock data means dependable COGS figures, which shape better decisions about your profits and tax position. If you would like guidance on tracking inventory management or want to improve your accounting software setup, we can help.
You can also find useful tips on preparing your annual accounts from Companies House. For expert advice on setting up robust systems or reviewing your current approach, get in touch with us to see how we can support you during the 2025/26 tax year and beyond.
Contact us today for direct support in tracking inventory management. Our team is here to help you refine your records and strengthen your financial position for 2025/26.
