What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023

November 29, 2022

When you become an eCommerce seller, inventory becomes your biggest asset and a majority of your capital investment goes into procuring it and storing it until it gets sold and starts to recover your expenditure. The value of the assets of any business provides insight into the financial condition of that business. A business is believed to be in good condition if its balance sheet shows that it has more assets than liabilities. It can be calculated if the business has kept records of every asset, sale, order, profit margin, liability, etc. 

In terms of business, these records are referred to as inventory valuation. The most important aspect of calculating inventory is knowing how much your inventory is worth during a financial time period like a quarter or fiscal year. It impacts the cost of goods sold (COGS) which ultimately determines the overall financial health of your business. 

In this guide, we will review the critical aspects of inventory valuation, the different methods used, and how to control inventory.

Table Of Contents
  1. What is Inventory Valuation?
  2. Why is Inventory Valuation Important for Businesses?
  3. What Are the Objectives of Inventory Valuation?
  4. 4 Most Prominent Inventory Valuation Methods in 2023
  5. What are the Challenges of Inventory Valuation?
  6. How to Choose the Right Inventory Valuation Method in 2023 and How Can Inventory LogIQ Help?
  7. Conclusion
  8. Inventory Valuation FAQs (Frequently Asked Questions)

What is Inventory Valuation?

Inventory valuation is a term used for calculating the value of inventory a company has during a particular time period. Inventory is a prime asset of an organization and to record it in the balance sheet, it needs to have a monetary value. This value can help you measure your inventory turnover, which will help you to plan your purchasing decisions. It is based on the total costs incurred to acquire the inventory and get it ready for sale.

You can find out yours by evaluating your cost of goods sold (COGS) and ultimately, your profitability. The most widely used inventory valuation methods are WAC (Weighted Average Cost), FIFO (First-in, First-out) inventory valuation, and LIFO (Last-in, First-out) inventory valuation.

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Why is Inventory Valuation Important for Businesses?

The cost of goods sold (COGS), gross income, and the monetary worth of inventory remaining at the end of each accounting period are all affected by how a company conducts inventory valuation. As a result, inventory valuation has an impact on a company’s profitability and prospective value as shown in its financial accounts. A few points that stress the importance of inventory valuation are listed below:

Impact on the Cost of Goods Sold

If the volume of goods sold is high at the end of the period of calculating inventory valuation, the total cost of goods sold will also be higher which means that most products from the inventory have been sold. Alternatively, if inventory has a lower valuation, holding costs will increase which will also lead to a higher overall cost. As a result, it has a significant impact on the profit levels reported.

Impact on Multiple Records

If the inventory valuation is not calculated correctly and on time, the errors may be recorded repeatedly for the next quarter/fiscal year. Because of the incorrect ending balance in the first period, it will be carried forward into the beginning inventory balance of the next reporting period, causing multiple errors in reported profits in two consecutive quarters or years, because of which, the balance sheet will not tally as more assets will always be shown.

Impact on Loan Ratios

If a business owner wants to take a loan for their business, the lender will base the loan on the company valuation and after passing it successfully, a restriction on the permitted proportions of current assets to current liabilities may be included in the loan agreement if a business has received a loan from a bank or lender. The lender has the option to cancel the loan if the entity fails to satisfy the target ratio. Inventory valuation is important because inventory is often the major component of the current ratio.

Impact on Income Taxes

When the balance sheet is involved during company valuation, the amount of income tax paid can be affected by the inventory valuation method used. The LIFO (Last-in, First-out) approach is widely used to lower income taxes paid during periods of rising prices.

LIFO matches current sales and current costs of those sales with historical sales. If the production costs of an item increase due to inflation, the cost of goods sold is increased under LIFO, which creates a higher cost of goods sold tax deduction and thus, a lower taxable income.

What Are the Objectives of Inventory Valuation?

The term inventory refers to products that are for sale. It covers raw materials, semi-finished items, and finished goods. At the end of each fiscal year, inventory valuation is performed to determine the cost of goods sold and the cost of unsold inventory.

This is critical because any excesses or shortfalls in inventory have an impact on a company’s production and profitability. There are various reasons to evaluate inventory. A few of them are:

To Evaluate the Capital Invested in the Business

You must have spent a lot of capital on your business, like most other retailers. Some of that money must have been spent on fixed assets like stores, warehouses, furniture, computers, etc., and most of it on assets that are variable in nature. Getting the value of fixed assets is a relatively simple task but knowing the monetary value of inventory is much more difficult so this is where inventory valuation can help. 

To Get the Sales Velocity of the Company

If you operate a small eCommerce business, it is much easier to conduct inventory valuation but when you provide the data of a specific time period in your balance sheet, it shows how many items you sold in that certain time period. This can give you an idea of how smartly you rotate your money on buying and selling your inventory. 

To Determine the MOQ and EOQ

When you evaluate inventory at the end of an accounting period, you are able to figure out how many products you have sold during that period so you know how much inventory you need to keep in stock to avoid overstocking and understocking. You can calculate the economic order quantity (EOQ) to get the ideal order size and the minimum order quantity (MOQ) so that you have an idea of the least amount of money you will need to spend on procuring inventory.

To Get Help in Taking Valuation-Based Loans

When a business owner wants to expand their business by adding more products to their selling list, listing the available products on multiple selling channels, and arranging for storage in multiple warehouse locations, it requires a steady amount of investment.

Most of the time, sellers take loans to invest in infrastructure for expansion. So for that purpose, banks demand access to the balance sheet to check the inventory valuation of the company to determine if they are eligible for the loan or not.

To Determine the Gross Income

As your inventory is stored with the ultimate goal to sell it and generate revenue, inventory valuation can easily show you the money that has been invested, earned, and is held up in procuring it. 

To determine the gross profit, match the cost of goods sold with the revenue of the accounting period.

Cost of goods sold = Stock at beginning of the accounting period + Purchases – Stock at the end of an accounting period.

The equation shows how inventory valuation influences cost and ultimately, the gross profit.

To Reflect the Financial Position of the Business

Inventory after closing is considered a current asset. The financial status of the business is determined by the value of the shares while filling out the final balance Sheet. Overvaluation or undervaluation can show a false image of a company’s working capital and overall financial position.

To Show Any Gaps Between Assets and Liabilities

An asset valuation tells you about the total value of assets you have at the end of a particular time period. When you have a strong idea about the figure of the valuable assets in your business, you can compare it with the liabilities and implement processes to reduce them such as extra warehouses, removing non-performing assets, getting rid of useless supply chain partners, etc.

4 Most Prominent Inventory Valuation Methods in 2023

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Source

First-In, First-Out (FIFO)

This strategy works with the idea that the first inventory purchased should be sold first. The remaining inventory assets are then matched and marked as the most recently purchased or produced assets. Because it is simple and easy to implement, it is one of the most commonly used inventory valuation methods by eCommerce sellers. The FIFO approach gives you a higher value of remaining inventory, a lower cost of goods sold, and a higher gross profit if there is inflation.

During inflation, when prices rise quickly, the FIFO model fails to provide a realistic picture of the costs. It also does not provide any tax benefits, unlike the LIFO technique.

Last-In, First-Out (LIFO)

As the name suggests, this inventory valuation method works on the idea that newer goods are sold first while the older inventory remains in stock. Businesses rarely adopt this strategy since older inventory can increase holding costs and become obsolete over time. The business suffers a big loss as a result of this.

The LIFO method is used at a time when eCommerce businesses expect inventory costs to rise over time because of price inflation. Businesses’ declared profit levels can be reduced by transferring high-cost inventory to the cost of goods sold which enables companies to pay less tax as a result of this.

Specific Identification Method

Every item in your inventory is recorded using this inventory valuation method from the time it is stocked until the time it is sold. It is typically reserved for large items that are immediately identifiable and have a wide range of features and costs associated with them.

The ability to trace each item individually using an RFID tag, stamped receipt date or serial number is the most important prerequisite for this system. While this method provides a high level of accuracy in inventory valuation, it is limited to valuing uncommon, high-value items that require these extra procedures. You can read more about inventory accuracy here.

Weighted Average Cost Method

Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory. The weighted average cost per unit is calculated as follows:

Average Cost Per Unit = Total Cost of Inventory Goods / Sum of Total Units in Inventory

The above inventory valuation method is mainly used to determine the cost for the total sum of units that are indistinguishable from one another and when it is difficult to track the cost of individual items.

It can be used to calculate inventory valuation by very niche businesses though it does not provide the actual valuation of a business.

What are the Challenges of Inventory Valuation?

Determining the Total Cost of Inventory

Use COGS for calculating the cost of your inventory:

COGS = Inventory at starting + Purchases – Inventory left

Therefore:

Inventory left = Inventory at starting + Purchases – COGS

The value of Inventory at the start and end of an accounting period may not be as simple as it appears. Anything you can’t sell for MRP due to damage, obsolescence, or even shifting consumer tastes must be marked down and valued properly. This makes determining the total cost of inventory a challenging affair.

Determining the Amount of Inventory Left

This is more challenging than it appears. If a business has products in transit, it must decide whether or not to include them in the inventory valuation. Many businesses keep track of goods using a periodic inventory management system. Companies use this technique to evaluate inventory after each accounting period. A perpetual inventory system, on the other hand, tracks every purchase order and sale, and updates inventory to reflect those transactions regularly.

Adding Other Related Costs

When you evaluate your inventory, you do not only add up the costs of the products you have but also the costs of procuring it like the transportation cost, inventory holding cost, delivery cost, insurance cost, packing and picking cost, etc. Even electricity that is utilized to store your inventory can be added to your inventory valuation. Adding the exact value of these expenses with the ratio of remaining inventory can be a challenge for a seller. It is nearly impossible to determine the actual expenses that occur due to the leftover inventory and the further expenses to keep it safe and fresh for as long as possible.

Calculating Depreciation

Depreciation is also a big factor that affects your inventory valuation. With time, inflation not only surges but object values also depreciate. Most of the time, electronic items depreciate when the latest and updated versions come into the market. For example, if you are selling a mobile phone and after a period of a few months, the same company launches a model with more features at the same price, the product sales of the older phone will reduce or stop entirely so ultimately, the company will have to sell it at a lower price.

Valuating Damaged Products

Products after they occur damage are difficult to monetarily evaluate. A seller cannot command its actual price. They can try to sell it as a refurbished product during sales or sell it to a second-hand dealer like Cashify.

The same thing happens with perishable products after a specific duration because storing perishable products is more expensive than the incomes they fetch in a highly competitive market space. Some perishable products demand special warehousing facilities like temperature control, special containers, etc.

Identifying Stock Discrepancy

The stock discrepancy is the difference between the physically available stock or inventory and the current inventory that is recorded in the system. To run a successful business, maintaining accurate stock is important but inventory discrepancy is a common scenario in real-life eCommerce operations.

When it comes to inventory valuation, the stock discrepancy is a big hurdle. To find out the inventory valuation, you should have an accurate figure for your inventory. If there is a disparity in the count, sellers need to find the mismatched amount of inventory by calling the manufacturer, rechecking old bills, etc. and after that lengthy process is done, the seller may not be able to account for those missing items so it can go to waste and cause differences in the final valuation.

Valuing Seasonal Items

The value and pricing of seasonal items change over time. When a season ends, the manufacturers also start offering heavy discounts and when sellers take advantage and procure items, the price of the same product will vary compared to the price it was bought at the beginning of the season.

For example, if you are a garments seller and you sell coats during winter but the weather doesn’t get as cold as you expected which results in lower demand for coats, you will have to store all that inventory till the next winter which can damage the products or make them obsolete as newer designs are introduced in the market.

If you always keep a record of your inventory with the help of inventory planning through inventory management software, you may not find any challenges during inventory valuation.

How to Choose the Right Inventory Valuation Method in 2023 and How Can Inventory LogIQ Help?

When choosing the right inventory valuation method, there is no absolute formula. It depends on the purpose of doing it and the type of inventory.

A few things to note about choosing the right inventory valuation method are:

  • FIFO generates the highest gross income at the present time while LIFO generates the least and WAC is somewhere in the middle. Assuming a normal inflationary scenario in which supply costs rise over time, FIFO generates the greatest taxes, while LIFO generates the lowest with WAC again in the center. It minimizes the consequences of inflation and deflation by matching recent income with recent costs.
  • When you or your customers want to know the cost and selling price of each unit, Specific Identification is the logical solution. People who buy and sell art may be curious about how the price of a certain piece altered from the year it was last purchased to the year it was sold.
  • LIFO, FIFO, WAC and Specific Identification are the most common inventory valuation methods. Some of the others which are used according to the preference of many sellers are:
  • First-In, Last-Out (FILO): Seller sells the firstly stored items at last.
  • First-Expired, First-Out (FEFO): Seller sells the earliest-expiring inventory first.
  • Highest-In, First-Out (HIFO): Seller sells the highest-cost inventory first.
  • Lowest-In, First-Out (LOFO): Seller sells the lowest-cost inventory first.

Conclusion

After getting this detailed information on inventory valuation, you must have gotten an idea of how it is helpful in the growth of your business. It is important for you to partner with a company that provides inventory management services by using the best procedures and the most advanced technology.

We at Inventory LogIQ provide our partners with the count, location (warehouse or transit) as well as monetary value of their inventory. We help you know the actual value of your inventory through different inventory valuation methods, handled by experts. 

inventory valuation_inventorylogiq

InventoryLogIQ is an AI-driven inventory optimization platform, that allows multi-channel brands to stop losing revenue on out-of-stocks, release cash from overstocked items, and accelerate shipping speed. Inventory LogIQ provides the actual figure of your inventory valuation as well as the value of each and every item that is available in stock through our custom SaaS solution – IMS (Inventory Management Software). To achieve better results in inventory valuation at the end of the financial period, Inventory LogIQ can help in:

  • Inventory planning
  • Smart inventory placement across multiple warehouses
  • LIFO and FIFO methods
  • Experts to handle every procedure
  • Deciding MOQs and EOQs
  • Alerts for replenishment when moving towards out-of-stock situations

Suggested Read: What is Inventory Aging?

Inventory Valuation FAQs (Frequently Asked Questions)

Supercharge your fulfilment with InventoryLogIQ now, contact our team.

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Inventory Cycle Count: A Detailed Guide Including Definition, Methods, Advantages and Processes in 2023

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Theft, often known as shrinkage in the context of inventory, may make it difficult for firms to stay profitable. Employees must also take proper care of damaged inventory by reporting the damage to a manager or supervisor so that inventory levels may be adjusted and the product can be returned to the manufacturer for a warranty replacement or credit. The need for staff training on inventory protocol, shipping and receiving policies, or manufacturing best practices is just one internal issue that inventory counts might highlight. Reporting Wages and Income Accurate revenue statements and other financial papers may be produced by businesses with the use of adequate inventory levels for reporting. For instance, making actual earnings and precise balance sheet statements depend on maintaining an accurate inventory. The board of directors, top management, and investors of an organization utilize this data to make choices regarding the course of the business. The accuracy of revenue, wages, and inventories is so crucial. Creating a Precise Budget Inventory counts are also used by businesses to assess how much has been sold and how much stock is still available. When determining which things are the most popular, this might give helpful information regarding the inventory turnover rate or how frequently the item sells. As a result, this can assist businesses in developing a precise inventory budget. They may choose which items and how many of each to have on hand. To prepare for the upcoming year's purchases, a retail business can, for instance, do an inventory count on seasonal items. 6 Main Types of Physical Inventory Count Methods The main types of physical inventory counting procedures include: Point-of-Sale or Electronic Counting Electronic counting scans and tracks goods digitally using specialized computer tracking software. For instance, many businesses utilize point-of-sale (POS) systems, which enable staff to scan things as consumers buy them. The application automatically subtracts the quantity from the inventory as soon as the buyer purchases the item, and the team monitors it through the POS system. The warehouse receiver adds new products to the system when the shop gets them using the same technology to increase stock. POS systems frequently communicate with other types of software, such as enterprise resource planning, accounting, or merchandising software. The firm employees may, for instance, conduct a physical inventory count to ensure that the physical and digital numbers match. Although this technology helps to increase inventory accuracy, the associated fees might raise a company's costs. Employees have time to become familiar with the system and appropriately carry out the operations. Manually Counting  Unlike automated counting, manual inventory counting involves staff members writing down the inventory results on paper. The management of a corporation can assign workers as necessary or have a dedicated employee or team perform physical inventory counts. To count, they can go about the shop, warehouse, or storage area to identify the things and add up the amounts using a spreadsheet or printout of the products. By using this technique, a business might avoid paying for the initial expenditures of building an electronic system. It is also helpful in confirming POS system findings. It's crucial to remember that human inventory counting might produce a range of results based on the size of the business, the accuracy, and the care taken by the counters. Periodic Counting Periodic Counting or Cycle counting is a method of physical inventory counting in small increments over the course of a month or year. For instance, to assure accurate data, a retail shop would tally the most popular produce items each Monday morning. Fourth Tuesdays, the specialized section receives a similar treatment, and so on. The corporation will gain from this in a number of ways. First of all, it enables the business to continue operating rather than shutting down to finish an entire physical inventory count. Additionally, since inventory is constantly counted and faults can be found promptly, it enables any inconsistencies to be resolved sooner. This is advantageous for quickly transporting goods or products that the business wishes to monitor. Many companies choose to perform a complete inventory count once a year and the regular cycle counts. Complete Physical Counting Companies frequently do a comprehensive physical inventory once a year. Organizations can utilize their own workers to count, engage temporary help, or pay an inventory counting agency to complete this task. Many organizations arrange shelves, storerooms, and warehouses before finishing a complete inventory to make sure that goods are located correctly and are simple to find. Depending on how things go at the firm, the business may temporarily close or stay open on inventory day. Counters can be given inventory lists or spreadsheets by managers, along with instructions on how to record the number of things sold accurately. At the conclusion of physical inventory counting, all counters give in their sheets to the supervisors, who then compile the findings. Spot Counting Spot counting, arbitrary counting or ad-hoc counting is a type of physical inventory counting method that is frequently started by the user and is not planned, making it useful in unusual circumstances. Let's say you counted a zone, but a few days later, the system malfunctioned because of someone or some procedure. Instead of waiting for the next cycle count, you can construct a new, empty order and begin adding counted items to it. Of course, your system must be able to compare the quantity that was tallied to the data stored in the program. Arbitrary counting is sometimes referred to as blind counting since it typically takes place in unplanned, tiny store/warehouse zones or locations. Tag Counting The personnel of the store or warehouse should physically tag each item prior to tag counting. The worker must complete the required slots on the tag with the item ID, counted amount, and other pertinent information during physical inventory counting. Some labels have two sides, allowing an additional worker to check the data and, if necessary, fill in the adjustment on the second side. These tags are gathered and added to the system as journals when the counting procedure is complete. The primary distinction between tag counting and all other counting techniques is that tag counting does not involve a direct comparison to system data. As opposed to just producing a counting order and comparing it to the tag counting list, it is more like creating a rough draught list of your goods and quantities, refining it (e.g., updating with sales that have occurred during the counting), and then comparing it to the final list. How to Conduct a Physical Inventory Count in 12 Easy Steps A successful retail business is built on effective inventory management. Customers will always find what they're looking for in a well-stocked backroom, and your workers will always have what they need to do their jobs. In the best-case scenario, organized stock supports your everyday operations so that personnel may concentrate on customers. At worst, you're left with a logistical nightmare of missing items and lost sales. Your staff will need to count meticulously, track, and process products on a regular basis to keep your inventory operating correctly. Are they driven to complete the assignment as inventory season approaches, or would they prefer to skulk off? The given steps for counting physical inventory can help you manage stress if you run a retail firm. Let's take a look: Check the Date It can be a big deal if you have to manually count your physical inventory every month, every three months, or at the conclusion of a reporting period. It may be necessary to take stock outside of regular business hours because it is a laborious operation. Give your team plenty of warning so they can plan accordingly around their commitments, and be sure to schedule workers correctly, so nobody takes on an opening shift. Post a sign in your store or on your social media accounts informing clients if you need to close your store during regular business hours. The secret is to plan. Assign Your Counters Physical inventory counting needs expertise. Before you allocate your counters, make the position a learning opportunity for both inexperienced and experienced workers by letting them train one another and providing checks and balances along the way. Make a written protocol and include information on how you'll establish a precise cut-off point for stock movement for an accurate count. Count teams typically consist of two individuals - one who counts and the other who records. To make sure that everyone will be accessible on the specified day and time, provide your team with their schedules as far in advance as you can. Notify All Storage Facilities Make sure to inform relevant third parties that they should likewise undertake a physical count of inventory on the given date, whether your organization has merchandise in outside storage or on consignment. To ensure that they are not counted, make careful to separate any recently acquired products. Deliveries to the warehouse should be delayed if at all feasible to prevent variations from occurring during the count. Before starting the count, you'll want everything to be free of clutter. Examine Your Stock A few days ahead of time, check your inventory to make sure everything is in order. Search for objects with missing or partial component numbers and those that are in a state that might complicate the procedure. Adjust your inventory as needed to make it ready for the physical count. Make a Proper Warehouse Plan Make sure your staff has a map of your floor, backroom, and storage so they know where to go when they need to. A map can let you allocate personnel to their stations more efficiently, whether you need to take photographs or sketch up a plan. Create a tracking sheet for each sector and assign a different number to each display, rack, and shelf. Visualizing your inventory area will reduce confusion and make it easier for your personnel to get started. Make Your Own Category You may count and group comparable objects together with the aid of categories. The categories for a retail setting may be footwear, tops, bottoms, outerwear, and accessories. Depending on your industry, these groups can be further divided based on color or gender. The counting procedure will be more smoothly executed if a systematic system is created. You'll run into certain things that don't have a designated spot in your store when you're arranging your physical count. It would be best if you made a decision on how to handle objects without a clear home. They can be transferred or returned from other places. Start the Pre-Count Make sure everything is tagged correctly and labeled before the count starts. After all the things have been tallied, failure to deal with stray objects can lead to problems and anger. Start early by counting some of the items. Put the objects that were counted in sealed boxes when the pre-count is done. The goods will need to be recounted if, on the day of the physical count, you discover broken seals on packets that have already been counted. Set Frequent Reminders Give your staff a review of what they learned in training before the big day. Walk your staff around the shop if you've relocated any stations or merchandise to prevent confusion. Distribute instructions that break down the counting procedure into simple stages. Despite the fact that there shouldn't be any things without labels or pricing, emphasize the significance of gathering such items in a specific location so they may be handled last. Explain the Procedure Lead by example and demonstrate to your staff the correct way to do a physical inventory count. Give them a sample of a completed form, then have them go over their initial try to ensure the form was filled out correctly. Assign the count teams to various areas of the shop using the map. To prevent double-counting, mark the regions on the map that have been counted. Get Set and Go Counting You may pair off your teams and start physical inventory counting now. The second person completes the count tag using the sample data below after the first person has finished counting: LocationItem informationportion numberQuantityMeasurement unit The team attaches the original count tag to the inventory item, keeps a copy, and turns the tags into the person in charge. The person in charge will verify that all titles have been completed entirely and none are missing. Recheck Your Possessions Perform spot checks in sections to see whether the items were appropriately counted. Take advantage of the chance to verify each section doubly if this stock audit finds a mistake. It will be worthwhile to double-check the counts that have previously been made. To assure the correctness of the inputs, a data entry team should additionally include two members. Complete the Reporting To add up your computations, record your physical inventory counts on a spreadsheet. Your inventory reports will enable you to find any discrepancies between the physical and book counts so that you can develop a strategy to eliminate them. To find potential patterns, compile physical count inventory records over a specified time period. Is there, for instance, a particular low-count spot in your store? Are there any procedures you might strengthen to prevent the loss of goods? Your business should be impacted by your reports and results in all areas, from financing to visual merchandising. 5 Benefits of Physical Stock Counting in 2023 To maintain accurate and up-to-date inventory records, physical inventory counts are a crucial component. Better sales and purchase estimates may be made thanks to correct inventory records, which also guarantee that you always have the proper quantity of stock on hand. Your consumers will benefit from having a physical inventory taken. Precise physical inventory counts are essential for the reasons listed below: Provides an Accurate Insight Into Inventory Levels  You will have a far better knowledge of how much merchandise you will need to have on hand to satisfy consumer needs when you effectively manage your inventory. You won't have to worry about running out of supplies all the time, thanks to this. By being aware of your inventory levels, you may prevent clients from making orders for items that are not currently in stock. Without having to worry about keeping too many goods on hand, shortages will be less of an issue. Improves Demand Predictions An essential component of inventory management is demand forecasting. It occurs when you foresee a product's level of demand, the rate at which it will sell out, and the time at which that SKU has to be restocked. A physical inventory check can enhance buying and forecasting of inventories. For example, retailers that see demand forecasting reports that suggest which products to replenish based on their profitability and restock rate can do so in a way that allows them to do so based on both the popularity and profitability of the items. Suggested Read: What is Inventory Forecasting? Enhances Sell-Through Rate of Slow-Moving Inventory An actual inventory count does more than avoid stockouts. Retailers also reduce the chance of keeping out-of-date stock at the total price for an extended period of time. Retailers should have access to inventory grading data that group items according to their cost per unit, selling price, number of sold units, and overall income over time. Merchants should proactively think about re-merchandising items in-store, advertising them to generate interest, or offering a special discount to encourage sales for those that aren't selling as intended. In order to recover your initial investment and create a place for more in-demand goods that either sell at a larger volume, have better profit, or both, it is helpful to move through failing inventory. Reduces Inventory Shrinkage Inventory loss is a frequent and annoying issue for merchants. When your actual stock is less than the amount listed in your inventory management software, this occurs. Theft by employees and shoplifting are the two main reasons for stock shrinkage. A weekly partial inventory count, for instance, can assist retailers in identifying discrepancies between a store's actual inventory and the inventory levels recorded in its point-of-sale system with a smaller sample size of inventory that is easier to count (one particular product category, for example), giving them enough time to determine what caused the shrinkage and reconcile it. Prevents Overstocking and Understocking  Lack of physical inventory tracking can lead to carrying too much (or not enough) goods, which could lead to budgetary concerns if not maintained under control. Overstocking, often known as the gap between available inventory and demand, has resulted in markdowns totaling more than $300 billion. Discounting at scale leads to lost income because of lower-than-expected margins on each transaction, despite the fact that it has valuable use cases. You can allocate enough money to inventory to satisfy demand without overstocking or understocking by maintaining an accurate inventory ledger and using the information from your POS system to understand better how well-liked the products you carry are with customers. 7 Best Practices to Implement for Counting Physical Stock in 2023 Make a Map of Your Shop, Warehouse or Stockroom Source Make a map of the locations where your inventory is kept, whether it be on your shop floor, in a stockroom, or in a warehouse, as part of your preparations. Label each product category's location and the person in charge of counting it on the map. This will aid store employees in getting their bearings and assist the manager you assigned to maintain track of who is in charge of what. Give each employee a list of the SKUs they will count in their assigned region as well. This may be a helpful tool when they scan product barcodes and enter their count into the POS system. Use Box and Shelf Labels Source Label shelves and boxes according to the things they hold and make sure the contents of each are located where they should be according to a map of your store. The shop map you made in the previous step should be reflected in these labels. Prior to the inventory count, it will be easier to stay organized and save time when it comes time to account for the miscellaneous things if boxes and shelves are proactively labeled and products are placed in their proper locations. Clean the Locations Where You are Counting Source Make sure there is enough space for employees to count large quantities of items in each location designated for stock-taking. Get rid of any boxes or inventory items that are unnecessary. Any freestanding furniture, such as mannequins or display cases, should be moved to one side. Use Barcode Readers Source While it is possible to hand count the objects, teams are more prone to make mistakes. For quicker and more accurate counting, choose barcode scanners. Store employees scan the barcode on the product's tag, and the inventory levels connected with that product's SKU are automatically entered into the POS system as opposed to each product having to be manually counted and recorded in a spreadsheet or on paper. Mis-counts are unlikely unless the store employee scans the exact same item twice. Barcode scanners are necessary for teams charged with counting enormous volumes of merchandise. Set a Time When Counting Will Be Handy Source Setting a deadline for your inventory count is worthwhile. Depending on how many things you carry, performing a physical count can take one business a whole day and another just a few. In either case, giving oneself too much time is preferable to not enough. Additionally, some retailers choose to conduct nighttime inventory counts, appointing a team of staff to enter the premises during off-hours. Just bear in mind that in many areas, paying employees more for midnight labor than for a shift during regular business hours is the norm. Train and Inform Staff Members Source Before beginning a comprehensive physical inventory count, take the time to teach and instruct your store personnel on how to perform it. To count inventory and record outcomes, every member of your team should be able to operate a barcode scanner and your POS system. Spend some time outlining the typical difficulties they may encounter. What happens if a tag is missing, a product is defective, or a label is mislabeled? To ensure that staff members know what to do in each instance, share the solution and the procedure you've put in place. Utilize Technology for Physical Inventory Count Source Pen and paper counting takes more time than electronic counting. It's simple to make a mistake when counting, leading to erroneous inventory data. Additionally, a physical stock count across many retail locations will generate more data that will require much more time to process and understand than if everything were recorded using inventory management software. Inventor management technology provides solutions to these issues. Inventory reconciliation is sped up, and merchants have a single source of truth for both their financials and inventory when they scan products since the point-of-sale system will automatically register inventory levels for that SKU. Suggested Read: Supply Chain Forecasting Conclusion: Improve Your Physical Inventory Counts With InventoryLogIQ In conclusion, it is crucial to perform routine physical inventory counts even if you have an inventory management system in case-specific procedures are not operating as effectively as they should. Inventory counts assist you in reducing unexpected shortages and identifying which internal processes need to be changed to enhance your business operations as a whole. One of the top providers of inventory and data-collecting services is InventoryLogIQ. We offer physical inventory counting, merchandise planning and space optimization services to the majority of large retailers across the nation using our custom OMS and professional team. The integrated, one-handed inventory count terminal and warehouse management solutions are the technological advancements from which InventoryLogIQ continues to hold an excellent reputation in the market. This will not only handle your complete inventory but also make doing an inventory count simple by offering a section just for counting your inventory and notifying you right away if there are any shortages or exceeding stock. Physical Stock: FAQs Why is the physical inventory count performed?The Inventory account balance is updated to reflect the actual amount of accessible inventory using the physical count. To ascertain whether there have been any theft, loss, damage, or inaccuracies in inventory, a physical count is performed. How frequently should physical inventory counts take place?At the very least once a year, a physical inventory count should be done, however more regular inspections might be helpful. You may ensure that your inventory and your records match by frequently verifying your stock. Additionally, you'll be able to see any issues with your record-keeping practices. How is physical inventory managed?Wireless inventory scanners make it simple to scan a product wherever it is stored using barcodes to distinguish between each SKU type. You can simply monitor things by SKU, know how much is in stock, and identify every SKU in a warehouse by adding a barcode to your product tags or packaging.

March 24, 2023
Perpetual Inventory System Guide: Definition, Methods, Factors Considered, Benefits & How is Perpetual Inventory Different From Periodic Inventory Systems in 2023

Perpetual Inventory System Guide: Definition, Methods, Factors Considered, Benefits & How is Perpetual Inventory Different From Periodic Inventory Systems in 2023

For any sustainable and successful business, a sound inventory system is required to track goods throughout the supply chain cycle. From purchasing raw materials to producing the goods and, finally, selling the product, proper inventory management is key. It’s an effective system that keeps records of purchased materials, sales inventory and also stock-on-hand details of your business entity. The fundamental structure of inventory management includes inventory purchase (ready-to-sell goods that are procured and delivered to the point of sale or warehouse), storage of inventory (inventory that is stored until needed) and goods and materials that are at different stages of the fulfillment network. There are two types of inventory, as stated below:  Periodic Inventory Perpetual Inventory  While both these accounting methods are similar (businesses use them to track the number of products, stock availability, etc.), they have several inherent differences. What is a Perpetual Inventory System? A perpetual inventory system allows businesses to keep a real-time account or stock of inventory on hand. The widespread usage of computers and technology has made this system very effective. Businesses worldwide have found that this system is highly user-friendly and has fostered the ease of conducting various processes, eliminating redundancies and complexities of the traditional inventory system. Barcodes, Radio Frequency Identification Scanners (RFID) and point of sales systems supported by perpetual inventory systems quickly input inventory information of all business transactions on a real-time basis. Perpetual Inventory Systems are popular in modern business. They are often found in large businesses across multiple industries, such as jewelers, electronic stores and global enterprises such as restaurant chains, clothing stores, etc. Perpetual inventory systems track the details of product sales instantly through point-of-sale systems (PoS). However, perpetual inventory does not keep track of physical stock/products. Inventory reports can be accessed online at any time, making it easier to manage inventory levels and the cash needed to purchase additional inventory. Updates are automatically created when you receive or sell inventory. Your inventory accounts immediately reflect data about purchases, return of goods and stock data. 6 Main Differences Between Perpetual Inventory and Periodic Inventory Systems A perpetual inventory system constantly updates the purchase and sales records constantly, which provides a real-time reflection into what is staying or leaving the warehouse. A periodic inventory system only records updates to inventory and costs of sales at scheduled times throughout the year, not on a constant basis. While a perpetual inventory system can record and monitor the movement of the stock non-stop, a periodic inventory system can update inventory records at intervals, which happens after the stock is physically accounted for. The 6 main differences are listed in the table below: [table id=1 /] Advantages of Perpetual Inventory There are multiple advantages of perpetual inventory, which gives companies the ability to operate more effectively. They are listed below: Provides Updates in Real-Time Perpetual inventory maintains live records of inventory as soon as it is bought or obtained by the company. This enables the retailer to always be aware of when stocks are running low, which items are popular, when items were bought etc., so they can plan accordingly and be ahead of the curve. Manages Inventory in Multiple Warehouses Gone are the days when companies had to maintain multiple spreadsheets or files and manually add and remove items from the list. Perpetual inventory systems consolidate all your inventory records which is stored across multiple warehouses in one place. This will help make processes more efficient and will surely mitigate any errors or delays. Keeps Users Informed Through Forecasting Using perpetual inventory, retailers have a better idea of their customers' purchasing patterns based on the inventory sold. They will have a better idea of which products are in demand, during which season and which price point is doing the best. They will also get an idea of which products aren’t doing well and are just accumulating space in the warehouse. This understanding will help the business forecast demand and supply in the future. Suggested Read: What is Inventory Forecasting? Assists in Accounting Procedures Inventory is a key aspect of every accounting process as it gauges the value of the assets that firms have on hand. Since perpetual inventory systems constantly track and provide updates on inventory levels, it becomes much easier and faster to access this information. Disadvantages of Perpetual Inventory Can be Expensive Perpetual inventory is generally regarded as not being a pocket-friendly solution because of all the technology and software that is needed to enable it. Adding new inventory lists can also be chargeable, in addition to needing to train employees on how to use them. Overall, it may not be the best option for small businesses that do not need to calculate inventory for multiple different warehouses. Does Not Consider Expired and Mishandled Goods  Since perpetual inventory systems utilize data from sales and purchases to maintain records of inventory, it sometimes leaves out items that have been purchased but may have expired or have broken due to mishandling. Since manual counts are not performed, the management will continue to count those items unless someone has physically noticed the incident. This opens the door for unwanted errors and discrepancies in the inventory count. 5 Operations of a Perpetual Inventory System Point-of-Sale System A point-of-sale or point-of-purchase in a perpetual inventory system is the place where the customer walks up to your checkout counter after they pick up a product or service at a store or business entity. A point-of-sale is the combination of hardware units and software applications that enable your business to make those sales to customers. Cost of Goods Sold Updates Cost of goods sold (COGS) refers to the direct costs of the production of goods sold by a company. This includes the cost of the materials procured and labor hired to create the goods. Indirect expenses like distribution costs and sales force costs are excluded in COGS. Reorder Point Automation A reorder point system alerts you about when to place an order, so you won't run out of stock and tells you when to place a requisition to replenish your stocks. The reorder automation point automatically calculates your stock based on supply chain forecasting that is based on past consumption data (historical data) to forecast future requirements. Purchase Order Automation Purchase Order Automation Systems streamline your purchase orders to increase efficiency by tallying with the corresponding invoice and requisition purchase requests automatically. Warehouse Management Software Typically, any warehouse management system (WMS) is designed to monitor the entire inventory in hand. It can also manage supply chain operations right from the manufacturing or distribution center and can coordinate with different parts of the supply chain to get tasks done. 6 Things to Consider Before Choosing An Inventory System Requirements Source You first need to assess your requirements and make a decision based on that. A small business would require a very different inventory management system than a multinational company. You would need to be aware of how much inventory you would need to manage, the nature of the inventory, the value of the items, etc. Expenses Source Because of the fact that certain inventory management systems are so dependent on technology, such as the perpetual inventory system, prices can easily skyrocket, which would be pointless if you don’t need all those features in the first place. Choose a system that fits your budget so that you can invest in other facets of your business. Configuration Options Source If your business deals with multiple types of inventory, scattered across different warehouses, it would be important to make a note of the customizability of the system so that you can get the most out of it. It would not be of any help if you are not able to manage your inventory as efficiently as possible due to constraints in your inventory management software. Ease of Use Source It is important for businesses, especially smaller ones, to factor in ease of use when they are opting for an inventory management system. If the system is too complicated and requires a sharp learning curve, it could take days for your employees to get accustomed to it. Choose a system that has all the features you are looking for but that is also well-designed and user-friendly. Integration Ability Source Inventory is the key component of any eCommerce business. It pays off to have an inventory management system that can play nice with other software tools and systems involved in other business activities. There shouldn’t be a bottleneck in any section of the business and you can do your best to make sure your inventory management system can integrate well with other applications. Flexibility Source Flexibility is a very important factor to consider while choosing an inventory management system since it’ll be handling such a key aspect of your business. You need to find out things like if it is compatible with devices of all screen sizes, what software platform it uses and if it can integrate with other systems. Once you understand this, it’ll make your decision much easier. Support Source After-sales support is a key factor when choosing an inventory management system, especially if you have shelled out a decent amount. You would want to have access to facilities such as tutorials and customer support in case something goes wrong and you need some assistance. Companies that care about their customers even after the sale is made often provide the best services. The 3 Main Methods of a Perpetual Inventory System FIFO Perpetual Inventory Method FIFO is a cost flow tracking system under which the first unit of inventory acquired is considered to be the first unit consumed or sold. The perpetual FIFO inventory method determines the cost of your oldest inventory and multiplies that cost by the total amount of inventory sold. LIFO Perpetual Inventory Method This method is a cost flow assumption that businesses use to evaluate their stocks wherein the last items placed in inventory are the first items sold. To Summarise, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Weight Averaging Cost Perpetual Inventory Method The weighted average cost method is a means of tracking inventory that assigns a cost to each unit based on the average cost of all units that are available for sale during a specified time period. The weighted average cost per unit is arrived at by adding the total cost of all units available for sale divided by the total number of units available. Perpetual Inventory Benefits for eCommerce Businesses in 2023 Shortens the Time Needed for Accounting Procedures During the preparation of financial books, usually at the end of the year, the value of the closing stock needs to be known. With a perpetual inventory system, this information is always on-hand as it reflects any changes to the inventory in real-time, which helps to speed up accounting procedures. Requires Less Investment in Materials Since perpetual inventory systems keep track of every purchase and sale of inventory, whether it is raw materials, finished goods or work-in-progress inventory or products, businesses can get a clear idea of the what amounts they are spending on what materials and it can help them optimize the quantities that are needed and thus, reduce inventory costs. Helps in Restocking A business will be able to know if inventory of a certain product is running low and will be able to reorder items before it runs out completely. This aids in the continuous fulfillment of customer orders and keeps the business running smoothly and effectively. Optimizes the Use of Resources Since perpetual inventory gives us a clear idea of what the expenses and incomes of the business are and where they are entering and exiting from, the business can optimize every process that involves working capital, whether it is labor working on a particular task, the purchase of materials, the transport of goods, etc. Helps Provide a Clear Picture Perpetual inventory systems update inventory levels in real-time. This means that you will always have an idea of which products are doing well and which aren’t. In addition, you’ll get access to more granular data such as seasonal demand for products, what causes spikes and dips in demand and much more. Conclusion: How InventoryLogIQ Can Help You Monitor Your Perpetual Inventory A perpetual inventory system provides more accurate information because ongoing recording and prompt verification of inventory are done. Perpetual inventory also enables financial statements to be prepared quickly and accurately. A Perpetual inventory system is best suited for big enterprises, while a periodic inventory system is suitable for small businesses. Perpetual inventory is the preferred method for tracking inventory with accurate results on an ongoing basis. If you need help with acquiring a perpetual inventory system for your business and any other inventory-related requirements, InventoryLogIQ can be a good option for you. InventoryLogIQ has a custom OMS that aids in providing real-time updates of your inventory levels across multiple warehouses. In addition, our platform can integrate with most big eCommerce marketplaces to ensure that all your inventory management and order fulfillment happens in one centralized location. We also give you deep insights into the inner workings of your inventory and order-related data so that you can plan ahead. Perpetual Inventory System: FAQs What is a perpetual inventory system?It is a program designed to estimate your inventory without any disruptions. A perpetual inventory system relies on electronic records rather than physical ones. It generally starts from the baseline with a physical count and details get updated as and when purchases are made and shipments come inward or move outwards. Why is it important to have a perpetual inventory system?A perpetual inventory system instantly tracks sales and inventory levels for individual items, which helps to prevent stock-outs. Perpetual inventory systems monitor the availability of stock at all times and alerts you whenever a product is out of stock or is getting depleted. Why is a perpetual inventory system most suited for eCommerce businesses?With a high degree of record accuracy, inventory reordering can be conducted with confidence and it ensures stable delivery timelines for your customers. The perpetual inventory system tracks every inventory transaction in real-time; the resulting inventory records are highly accurate and reliable. This may improve customer satisfaction and bolster sales. It also gives business owners a more accurate understanding of customer preferences and centralizes the inventory management system for multiple locations.  What are the advantages of the perpetual inventory system over the periodic inventory system? A Perpetual inventory system captures and tracks updates to inventory and costs of sales throughout the year. A perpetual inventory system is designed to update and record the inventory account automatically whenever a sale or purchase takes place. Each sale or purchase that happens immediately upon sale or purchase is recognized. A periodic inventory system updates the inventory account at certain scheduled times or at the end of an operating cycle. The update and recognition could occur at the end of the month, quarter or year. There is a gap between the sale or purchase of inventory and when the inventory activity is recognized. A faster inventory system enables companies to react faster to the supply and demand of the market.  What kind of business is ideally suited for a perpetual inventory system?Typically a large enterprise with large amounts of inventory, sales volumes and multiple retail outlets need perpetual inventory systems. The scope for marginal errors with the periodic system is higher when compared to the perpetual system because it is based on a physical counting system. Many leading eCommerce enterprises use a perpetual inventory system for tracking stocks at their stores and warehouses such as Amazon, Walmart, Marks & Spencer and others.

March 23, 2023