How to value stock for finance and accounts

Q: How should I value stock in my accounts?

At the lower of cost and net realisable value — its cost to buy or make, or what you could sell it for less selling costs, whichever is lower. Use a consistent costing method such as FIFO or weighted average to establish cost. This is the standard UK accounting rule and stops stock being carried above its real worth.

Q: What's the difference between FIFO and weighted average?

FIFO (first in, first out) assumes your oldest stock sells first, so closing stock is valued at the most recent costs. Weighted average values all units at the average cost of what you hold, smoothing price changes. Both are accepted under UK GAAP — LIFO isn't. Pick one and apply it consistently.

Q: Why does a lender value my stock lower than I do?

Because lenders price in forced-sale value, not balance-sheet value. If they had to recover and sell your stock quickly, they'd get less than its accounting worth — so they apply a haircut, advancing only a percentage. Specialised, perishable or slow-moving stock is discounted hardest, or excluded altogether.

Q: What should I do with slow-moving or obsolete stock?

Write it down to what you could realistically sell it for, or write it off if it's genuinely unsellable — don't carry it at full cost, as that overstates your profit and assets. Reviewing for obsolescence regularly and clearing dead lines, even at a loss, often frees up more cash than the write-down costs on paper.

3 min read

Lower of cost or NRVThe accounting rule

FIFO / weighted avgCommon costing methods

Haircut appliedWhen used as security

Why stock valuation matters

For many businesses, stock — raw materials, work in progress and finished goods — is the largest item in current assets, and how you value it ripples through everything. It directly affects your reported profit, the strength of your balance sheet, and how much cash is tied up in your working capital cycle.

It matters for finance too: stock can serve as collateral, and a lender will form its own view of what it's really worth. Over-valuing stock flatters your accounts but doesn't fool a lender, and under-valuing it understates a genuine asset. Getting it right keeps both your reporting and your borrowing honest.

Apply the accounting rule and a costing method

UK accounting requires stock to be valued at the lower of cost and net realisable value (NRV) — its purchase or production cost, or what you could actually sell it for less selling costs, whichever is lower. This stops businesses carrying stock above what it can fetch.

To establish cost where prices change over time, pick a consistent method:

FIFO (first in, first out) — assumes the oldest stock sells first; common and widely accepted.
Weighted average cost — averages the cost of units held; smooths price swings.

Whichever you choose, apply it consistently year to year. (LIFO — last in, first out — isn't permitted under UK GAAP.) Consistency lets you and a lender compare like with like over time.

Deal with slow-moving and obsolete stock

Not all stock is worth its cost, and pretending otherwise is the most common valuation error. Stock that's slow-moving, damaged, out of season or obsolete should be written down to its realistic net realisable value — sometimes to little or nothing.

Be honest about it:

Review for ageing and obsolescence regularly, not just at year-end.
Write down lines you'd have to discount heavily to shift.
Write off stock that's genuinely unsellable — see write-off for the accounting treatment.

Carrying dead stock at full cost overstates both your profit and your assets, and ties up cash you could release. Clearing it — even at a loss — often frees more usable cash than the write-down costs on paper.

How lenders haircut stock as security

When stock is offered as security — common in asset-based lending — a lender won't advance against its full book value. They apply a haircut, lending only a percentage, because forced-sale value is well below balance-sheet value.

How big the haircut is depends on the stock:

Liquid, standard goods with a ready resale market attract a smaller haircut.
Specialised, perishable or bespoke stock attracts a larger one — it's hard to sell on quickly.
Slow-moving or obsolete stock may be excluded entirely.

So a £100,000 stockholding might support far less in borrowing. This is one reason a lender like Credicorp, which lends against your company's trading cash flow rather than pledged stock, can be simpler — there's no asset to value, discount or monitor.

Keep records a lender can trust

Whatever your stock's worth, you need to be able to evidence it. Robust stock records — regular counts reconciled to your system, a clear costing method applied consistently, and a documented policy for write-downs — underpin both reliable accounts and any finance conversation.

A lender assessing stock as security will want to see accurate, current figures, not a year-old estimate. Good stock control also sharpens your own decisions: it reveals what's selling, what's stuck, and how much cash is locked in inventory. If stock valuation is constantly tying up more cash than the business can spare, that's a working capital question — and a flexible working-capital facility can bridge the gap without pledging the stock itself.

Frequently asked questions

How should I value stock in my accounts?

At the lower of cost and net realisable value — its cost to buy or make, or what you could sell it for less selling costs, whichever is lower. Use a consistent costing method such as FIFO or weighted average to establish cost. This is the standard UK accounting rule and stops stock being carried above its real worth.

What's the difference between FIFO and weighted average?

FIFO (first in, first out) assumes your oldest stock sells first, so closing stock is valued at the most recent costs. Weighted average values all units at the average cost of what you hold, smoothing price changes. Both are accepted under UK GAAP — LIFO isn't. Pick one and apply it consistently.

Why does a lender value my stock lower than I do?

Because lenders price in forced-sale value, not balance-sheet value. If they had to recover and sell your stock quickly, they'd get less than its accounting worth — so they apply a haircut, advancing only a percentage. Specialised, perishable or slow-moving stock is discounted hardest, or excluded altogether.

What should I do with slow-moving or obsolete stock?

Write it down to what you could realistically sell it for, or write it off if it's genuinely unsellable — don't carry it at full cost, as that overstates your profit and assets. Reviewing for obsolescence regularly and clearing dead lines, even at a loss, often frees up more cash than the write-down costs on paper.