Use the FIFO approach to manage your stock’s life cycle efficiently

Manage your stock using the FIFO method (First In, First Out)

Nventree inventory management software

Even if Nventree will update your stocks and automatically sync them with your sales platform accounts (eBay, Amazon, etc) and some of the most popular e-commerce websites (Magento, WooCommerce, Shopify), you should always keep track of the life cycle of your items in stock.

As companies grow, so do their inventory needs. And seeing that inventory is usually purchased at different rates or manufactured at different costs over an accounting period, there is a need to determine what cost needs to be assigned to each product in the company’s inventory.

 

Inventory management made easy with FIFO First in First out

Let’s take for example the very probable situation in which a company purchased the same merchandise three times in a calendar year at £50, £60 and £70, due to inflation. What cost should the seller attribute to inventory for that particular item or items?

First in, first out is the way to go! FIFO is an asset-management and valuation method in which the assets produced or acquired first are sold, used or disposed of first and may be used by an individual or a corporation.

For tax reasons, FIFO assumes that the assets that remain in inventory are matched to the assets that are most recently purchased or produced. In that way, the calculated cost of older inventory is assigned to cost of goods sold and the calculated cost of newer inventory is assigned to ending inventory.

First in, First out - the best way to keep inventory rolling

There might be instances in which the actual flow of inventory may not exactly match the first-in, first-out pattern, but if we take into consideration that the earliest goods purchased are the first ones removed from the inventory account, this will always result in a healthy and fair stock management, based on costs and number of sales.

There are multiple layers that help sellers calculate the FIFO approach, depending on the number of identical items bought at different times and different prices.

 

 

 

 

FIFO method

Continuing the example we gave at the beginning, the £50/item merchandise will represent the first layer, the items bought for £60 will be part of the second layer and so on. Thus, the first FIFO layer, the first inventory layer, will be the first to be sold at all times. Next will be the second layer and so on, which will result in a perfectly organized stock management.

 

 

 

This is the most commonly used method to estimate the value of inventory on hand at the end of an accounting period and the cost of goods sold during the period and the reason for this is that sellers can get an easier and better understanding of their own selling activity based on the acquisition cost of their own merchandise. By shipping the oldest items first, sellers prevent degradation of their products and can thus avoid potential inventory obsolescence. Customers will also receive their products in relatively clean boxes, because products will have spent less time in the warehouse.