As a small business owner, you need to manage your inventory in a way that you reduce or eliminate shrinkage. Poor quality products ending up in the hands of your customers have a negative effect on your reputation. You might lose customers and never get them back. One of the ways to reduce spoilage or obsolescence of inventory is by changing your stock management system. A method you should consider implementing is first-in, first-out (FIFO).
These are some of the benefits of using the FIFO method.
Easy to Implement
Many businesses, both big and small, use the FIFO method because of its simplicity and user-friendliness. This is so because it moves the oldest products first before the newest ones. This approach makes it easier for you to monitor inventory. It is a practical and consistent accounting method that makes it simpler to determine the costs of the products your business has sold. This method also makes it difficult to manipulate financial statements, which is another reason many businesses use it.
Reduces Risk of Obsolescence and Spoilage
The FIFO method reduces the risk of inventory spoilage and obsolescence. Since the oldest products are sold first, it guarantees that you move out items before their expiration date, before they are obsolete, or out of fashion in the eyes of your customers. This allows you to convert inventory into cash before you have to sell them below retail price. Some small business owners are stuck with inventory that is difficult to move. In such cases, they have to take a loss in order to get some cash in return. You don’t want this to happen to you. The FIFO method enables you to avoid this problem.
Matches Costs
Seasonal demand creates increases and decreases in your cash flow. The FIFO method enables you to determine a precise match of the current value of inventory and its costs. This allows you to manage cash flow regardless of fluctuations in demand. It also makes it easier to make a budget for your company’s operations. You will be able to identify where your resources go and which products need additional funding for better quality or development.
Boost Gross Profit
This method increases gross profit because the calculation of the costs of goods sold is lower compared to using the last-in, first-out method. This provides you with a rosy financial overview regarding the growth of your small business. It also offers you a glimpse of the potential profit your company can make over time.
These are some of the advantages of using the FIFO method for your stock management system process. It has its disadvantages such as:
- You will incur higher tax liabilities when you use this method. This is so because of the higher profit you generate.
- FIFO is disadvantageous when the materials and inventory you buy have price fluctuations.
- It oversimplifies costs.
Despite the disadvantages, FIFO is still an accounting method you should consider implementing. If you need help with some bookkeeping tasks, we at Robookkeeper can assist you. We offer first-rate bookkeeping services for small business owners. We have a team of experienced, virtual bookkeepers that can assist you. You give us your accounting books and we will update them for you.
