5 Inventory Valuation Methods for Optimal Valuation of Your Inventory
Posted: Sun Dec 22, 2024 8:53 am
In a recent article, we looked at the relationship between costs and sales and how knowing your gross margin is essential to growing your retail business.
Inventory management for a retail business is essential. It is often one of the largest costs, while being the main source of revenue for the company.
This delicate balance is why it can be helpful to better understand how to track, understand, and improve inventory costing in your accounting.
In simple terms, calculating inventory cost helps retailers estimate the value of their merchandise.
In this article, we will present you 5 methods to evaluate your stocks :
The Retail Inventory Method
The specific identification method
The first in, first out (FIFO) method
The LIFO (Last In, First Out) method
The weighted average method
Lightspeed Retail, the cash register that optimizes your inventory
Keep tabs on your inventory with up-to-date reports from a single POS system.
Schedule a demo
The impact of inventory on retail profitability
Before we move on, another word on the importance of inventory. Without a systematic review of your inventory, it can be difficult to get an accurate picture of your inventory levels and how they impact your germany whatsapp number business’s operational costs.
You need to make sure you know how much inventory you have in your business at different times , as well as product-level data on what's selling and what's not (or selling less well).
Make the most of your data
Find out in this free guide how to identify the relevant data for your store.
Download the guide for free
Likewise, it helps to know how much inventory is being sold or lost each day, month, and year through frequent cycle counting of your inventory and accurate inventory management reports. Without regular tracking, having too much or too little inventory can impact your bottom line.
The Retail Inventory Method Explained
The retail inventory method provides a store's ending inventory balance by measuring the cost of inventory relative to the price of the goods. In essence, it determines the amount of expenses to be recorded for this period compared to the next period.
The retail method assumes that all of your inventory has a constant profit margin, explains Abir Syed of UpCounting . “So you take the total value of what you have to sell, reduce it by its margin, and use that number as your cost.”
The Advantages and Disadvantages of the Retail Inventory Method
The advantage of this method, Abir explains, is that it is extremely easy to calculate and can work when tracking inventory costs is not recurring.
“The main drawback is that it is usually not very accurate, especially if prices fluctuate at different times of the year (which most retailers do) and if products have different margins.”
According to Tim Yoder, tax and accounting analyst at FitSmallBusiness, the retail inventory method works best if you have a standard margin, across broad product lines. “If your margins vary a lot from product to product, your estimate won’t be very accurate,” Tim says.
Inventory management for a retail business is essential. It is often one of the largest costs, while being the main source of revenue for the company.
This delicate balance is why it can be helpful to better understand how to track, understand, and improve inventory costing in your accounting.
In simple terms, calculating inventory cost helps retailers estimate the value of their merchandise.
In this article, we will present you 5 methods to evaluate your stocks :
The Retail Inventory Method
The specific identification method
The first in, first out (FIFO) method
The LIFO (Last In, First Out) method
The weighted average method
Lightspeed Retail, the cash register that optimizes your inventory
Keep tabs on your inventory with up-to-date reports from a single POS system.
Schedule a demo
The impact of inventory on retail profitability
Before we move on, another word on the importance of inventory. Without a systematic review of your inventory, it can be difficult to get an accurate picture of your inventory levels and how they impact your germany whatsapp number business’s operational costs.
You need to make sure you know how much inventory you have in your business at different times , as well as product-level data on what's selling and what's not (or selling less well).
Make the most of your data
Find out in this free guide how to identify the relevant data for your store.
Download the guide for free
Likewise, it helps to know how much inventory is being sold or lost each day, month, and year through frequent cycle counting of your inventory and accurate inventory management reports. Without regular tracking, having too much or too little inventory can impact your bottom line.
The Retail Inventory Method Explained
The retail inventory method provides a store's ending inventory balance by measuring the cost of inventory relative to the price of the goods. In essence, it determines the amount of expenses to be recorded for this period compared to the next period.
The retail method assumes that all of your inventory has a constant profit margin, explains Abir Syed of UpCounting . “So you take the total value of what you have to sell, reduce it by its margin, and use that number as your cost.”
The Advantages and Disadvantages of the Retail Inventory Method
The advantage of this method, Abir explains, is that it is extremely easy to calculate and can work when tracking inventory costs is not recurring.
“The main drawback is that it is usually not very accurate, especially if prices fluctuate at different times of the year (which most retailers do) and if products have different margins.”
According to Tim Yoder, tax and accounting analyst at FitSmallBusiness, the retail inventory method works best if you have a standard margin, across broad product lines. “If your margins vary a lot from product to product, your estimate won’t be very accurate,” Tim says.