Ever feel like you’re constantly juggling inventory prices? Inflation makes it feel like a game of whack-a-mole, doesn’t it? Businesses use the FIFO method to tackle such situations. Don’t worry, it’s not as complicated as it sounds. FIFO, which stands for “First In, First Out,” is how companies track their inventory costs. And it just means they assume the oldest items get sold first.


Why should you care about FIFO? Well, it’s not just for accountants. It can impact a business’s bottom line, leading to more accurate financial reports and potentially higher profits. In this guide, we’ll break down FIFO step-by-step, showing you exactly how it works and how to use it to your advantage.


What is FIFO (First In, First Out)?


FIFO, short for “First In, First Out,” is how businesses keep tabs on inventory costs. With FIFO, the products or materials a company buys are assumed to be the first ones it sells or uses. Even if a company doesn’t sell the oldest items first, they pretend they do for accounting purposes. This is because FIFO helps them determine their Cost of Goods Sold (COGS), a term for how much it costs to make or buy the stuff they sell. It also gives them a good idea of what their remaining inventory is worth.


Inventory costs can change over time due to inflation or supplier discounts. By assuming they sell the oldest (often cheaper) stuff first, businesses can better understand their profits and losses. FIFO isn’t just about number crunching, though. It can also help businesses avoid ending up with many outdated products gathering dust on the shelves. After all, no one wants to buy last year’s phone model or expired milk, right?



Why Companies Use FIFO




FIFO aligns the cost of goods sold with their current market value. Let’s say you bought a batch of widgets for $10 each a few months ago, but now they’re selling for $15. With FIFO, your financial reports will show that you sold those $10 widgets, giving you a clear picture of your profit. It’s like knowing exactly how much you made on that garage sale.




But it’s not just about bragging rights on profits. FIFO can boost those profits. How? Remember, prices usually go up over time. With FIFO, you’re selling your older, cheaper inventory first, so your cost of goods sold is lower. This translates to higher profit margins.


Obsolescence Reduction


Have you ever had milk spoiled in your fridge because it was pushed to the back? FIFO helps businesses avoid that problem, too. Assuming the oldest inventory is sold first, it ensures that products don’t sit around too long. This is especially important for perishable goods like food, but it applies to anything that can become outdated or lose value over time.


Quality Control


Speaking of food, FIFO is a lifesaver for grocery stores and restaurants. If they used the opposite method (LIFO, where the newest stuff gets sold first). You’d end up with mouldy bread and expired milk. FIFO helps ensure customers get fresh products, meaning happier shoppers and diners.





FIFO is easy to understand, even if you’re not an accounting whiz. It’s a straightforward concept that doesn’t require complex calculations or fancy software. That’s why it’s a great option for small businesses or anyone just starting with inventory management.




FIFO is the go-to method for many accounting standards, like the International Financial Reporting Standards (IFRS). If your business needs to follow these rules, FIFO is your friend.



How FIFO Works: A Step-by-Step Guide


Step 1: Track Your Inventory


The first step to FIFO is meticulous record-keeping. Every time you get a new batch of inventory, jot down the date, the number of items, and how much each one cost you. Think of it like a diary for your products, documenting their journey from the warehouse to the customer.


Step 2: Keep an Eye on What’s Flying Off the Shelves


Next, you gotta track your sales. This means knowing how many items you’ve sold from each batch of inventory. You wouldn’t want to sell all your new stock and leave the old stuff to gather dust, would you?


Step 3: Crunch the Numbers for COGS


Now calculate the Cost of Goods Sold (COGS). Start with your oldest batch of inventory. Multiply the cost per item by the number you sold.  You bought 50 widgets at $5 each and sold 20. Your COGS for those 20 widgets would be $100 (20 widgets * $5/widget). If you sold over 50 widgets, you’d move on to the next oldest batch and repeat the process.


Step 4: Figure Out What’s Left


The final step is calculating the value of your remaining inventory. This is where it gets a bit like a puzzle. For each batch you have left, multiply the items by their original cost. Then, add up the batches’ values to get your total ending inventory.





LIFO stands for “Last In, First Out.” It’s like a reverse version of FIFO – instead of assuming you sell the oldest items first, LIFO assumes you sell the newest ones. It’s like grabbing the milk carton at the back of the shelf, hoping it’s the freshest.


Now, here’s where things get interesting. LIFO has a sneaky tax advantage. Since prices usually increase over time, the newest inventory tends to be more expensive. By selling that first, your COGS (cost of goods sold) is higher, which means your profits look lower on paper. Lower profits mean lower taxes.


So, which method is better? It depends on your priorities. If you’re looking for a simple, globally accepted method that often leads to higher profits, FIFO is your go-to. But if you want to potentially lower your tax bill, LIFO might be worth considering.


Remember that while LIFO can be tempting for tax reasons, it might not always be the most accurate way to reflect your inventory costs. It’s like telling your friends you got a great deal on that new TV, even though you paid full price. On the other hand, FIFO is more transparent and tends to give a clearer picture of your financial situation.



Best Practices and Tips for Implementing FIFO


Label Everything


Clearly label each batch with its purchase date or batch number. This makes it easy to identify the oldest items when it’s time to sell or use them.


Get Your Team On Board


Make sure everyone who handles inventory understands FIFO and why it’s important. It’s like teaching your family the fridge rules – everyone must be on the same page. Explain how FIFO can help the business save money, reduce waste, and keep customers happy.


Let Technology Lend a Hand


Inventory management software can be a lifesaver, automatically tracking your inventory levels and calculating COGS using FIFO. It’s like having a personal assistant for your stockroom.


Keep Things Fresh


Make a habit of checking your inventory regularly. Look for items sitting around for a while and prioritise selling or using those first. This is especially important for perishable goods, but it’s a good practice for any type of inventory. Remember, FIFO is all about keeping things moving.


Rotate, Rotate, Rotate


The oldest items should be in front and ready to be grabbed first. This might mean physically rearranging your shelves or storage areas. But trust me, it’s worth the effort to avoid ending up with many expired or obsolete products.





FIFO can streamline your business, keep your inventory fresh, and potentially boost your bottom line. Whether running a small shop or a large-scale operation, FIFO can help you make informed decisions and stay ahead of the curve.


But managing inventory is just one piece of the puzzle. To truly optimise your business, you need a reliable logistics partner. That’s why NimbusPost can be your go-to logistics partner. With its cutting-edge technology and extensive network of courier partners, NimbusPost handles the heavy lifting of shipping and logistics so you can focus on what you do best – running your business.


From finding the most cost-effective shipping rates to tracking your shipments in real time, NimbusPost simplifies the entire process, allowing you to deliver a seamless experience to your customers.


So, if you’re ready to take your business to the next level, consider combining the FIFO inventory management with the efficiency of NimbusPost’s logistics platform. It’s a winning combination that can help your business thrive in today’s competitive market.

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