Why Is the FIFO Inventory Method So Popular?

Why Is the FIFO Inventory Method So Popular?

There are several different good approaches you can take to managing inventory, but one of the most popular ones is First In, First Out, or FIFO.

FIFO, which sees the oldest items purchased being sold first, is particularly well-suited to businesses that sell food and other items that expire, like medications.

To get an idea of how FIFO works, consider a grocery store that is selling eggs. Let’s say that the store receives shipments of fresh eggs on Tuesdays and Thursdays. A person who goes there to buy eggs on Thursday will most likely be buying eggs that came from Tuesday’s delivery because those are the ones that are placed on the shelf first.

Meanwhile, the store will be assigning all of the egg sales to the Tuesday shipment until the number of units received that day runs out. This is even the case if a customer happens to reach toward the back of the shelf to buy fresher eggs. This can grow complicated quickly if the price of the shipments varies from day to day.

Nevertheless, businesses selling perishable items find that FIFO provides the most accurate calculations of profits and inventory. It’s also a good approach for businesses that aren’t dealing with items that will expire because it means that any inventory remaining on the shelf at the end of the year or month will be valued at a cost that more closely matches the current price for those items. This helps strengthen the balance sheet report and the profit and loss report, something that can appeal to potential investors.

Are There Any Drawbacks?

There are also a few disadvantages to using FIFO. For example, because it results in higher profits, it could lead to a higher tax bill. There’s also the fact that some shoppers reach to the back of the shelf for fresher goods, which means there is no way to guarantee the oldest items will always be sold first. Therefore, some items could expire before being sold.

FIFO’s advantages tend to outweigh its drawbacks, which is why it remains one of the top choices for many businesses when it comes to inventory calculation.

This blog post was based off of an article from Fit Small Business. Read the full article here.