5 Inventory Valuation Methods 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 is essential for a retail business . It’s often one of the largest costs, while also being the company’s main source of revenue.5 Inventory Valuation Methods
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 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
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The Impact of Inventory on Retail Profitability
Before we move on, a quick word on the importance of inventory. Without a systematic review of your stock, it can be difficult to get ig data an accurate 5 Inventory Valuation Methods picture of your inventory levels and their impact on your 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 is selling and what is not (or selling less well).
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Likewise, it’s helpful to know how use email sequences for nurturing much inventory is being sold or lost each day, month, and year through frequent cycle counting 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 against the price of the goods. In essence, it determines the amount of expenses to be recorded for this period compared alb directory to the next period.
The retail method assumes all 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 figure as your cost.”