Keeping a close watch on your inventory ensures you always know the fastest- and slowest-moving products you have in stock. Why is that important? Because it helps you know when you should reorder popular items and when you might need to discount slow-movers to make room for more-profitable inventory. An even more vital factor in understanding your inventory comes down to knowing the value of in-stock merchandise, which helps you determine how much to markup each item to meet your profit goals.
Why Do You Need to Manage Inventory?
If you know exactly how much you have of any of your items, where those products are located, and which products are coming in and going out, you can lower your overall costs, fulfill orders much more expediently, and even stop fraud in its tracks. You can assess your current financial health knowing your inventory and assets, you can balance your chart of accounts, and run accurate financial reports.
Inventory management maintains your warehouse stock balance. Do you want to lose out on sales? Of course not, and always being savvy regarding your inventory balances means no unfortunate “out of stock” or “currently on backorder” messages appear for your customers. If such messages become a recurring issue, some customers might opt for a different storefront entirely.
At the same time, if you’ve got leftover inventory from three years ago, most likely that stock is outdated and won’t sell. Plus, the longer you hold inventory, the greater the chances it can be damaged and become unfit for sale. The best way to manage your inventory is to understand demand for the products you carry.
Methods of Inventory Management
There are various inventory management methods to help you maintain control over your inventory. Spreadsheets are good if your business is small and your number of daily transactions is low. If your business experiences high-volume sales, though, updating spreadsheets is an incredibly labour-intensive procedure that simply takes too long, costs a lot (after all, more man-hours means more payroll!), and leaves too much grey area for human mistakes. Additionally, when it comes time to run financial reports, the information is too bulky to share with accounting staff and, if any entries are incorrect, all your calculations on your financial statements are also incorrect.
Automating your retail inventory management means less paperwork and more accurate reporting. You can choose standalone software apps, or track your inventory with QuickBooks. It seamlessly integrates all your financial information and offers accurate financial documents. Depending on the method you choose, you can even incorporate barcode scanning so each item coming into your warehouse and leaving your storefront is accounted for in real-time. One of the most reliable inventory tracking methods is known as the retail method of inventory management.
What Is the Retail Method?
The retail method of inventory management is an accounting procedure that estimates the total value of in-stock products. Using this method, you add your inventory costs, including freight and other expenses, then subtract total sales from the sum. You then multiply that amount with your cost-to-retail ratio, or the percentage you marked up your products after purchase. To determine your cost-to-retail ratio, add beginning inventory costs to new inventory costs. Then divide the sum of the costs by the total of beginning inventory value and new inventory value.
The Retail Method in Action
The retail method comes in handy when you stock online or brick-and-mortar shops with clothing or other tangible merchandise. Let’s say you own a retail clothing shop with $9,000 worth of merchandise in stock, then you add another $1,000 when you purchase 100 shirts from a wholesaler. If you mark each item in your shop up 100%, it gives your $10,000 inventory a retail value of $20,000. When you have sales of $10,000 and wish to know how much to reorder to fill your shelves, you can use the retail method to estimate your current inventory. Take the total value of the stock, or $20,000, then subtract the $10,000 in sales, which equals $10,000. Now divide the original $10,000 inventory cost by current $10,000 value to get an even ratio of one. When you multiply your ending inventory total of $10,000 by one, you see that your current inventory has a $10,000 value.
Advantage and Disadvantages of the Retail Method
The retail method of inventory management saves you time by eliminating the need to take physical inventory when you want to know the value of your stock. Using this method, you only need to record the retail prices and perform some simple math. This makes the retail method great when you need to create a business budget or prepare financial statements to use when seeking investors or filing paperwork.
Complications arise when you mark down prices for sales and other special events, requiring additional subtraction to calculate accurate totals. Also, the retail method fails to take damaged items or shrinkage into account, leaving you with approximations rather than precise totals.
When you need a quick and easy way to calculate the value of your inventory, the retail method comes in handy. By knowing the approximate value of the products you have in your warehouse or storeroom, you can better gauge sales performance and know when you need to reorder items or seek out new product lines. 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.