Which Inventory Valuation Method Is Best For Your Retail Store?
There are no direct answers to this question. The best inventory valuation strategy for your retail business will depend on several factors. Market conditions and your company’s financial goals will determine the method that will work best for you. The following scenarios can help you determine the best inventory valuation technique for your business.
1. Seeking a Business Expansion Loan
If you plan to apply for a loan, you will need to hold your inventory as collateral. In this case, it is best if your inventory value is high, as a higher valuation will give the lender more confidence.
For example, if prices rise throughout the year, a FIFO inventory valuation technique will give you a higher value for the final inventory. A LIFO technique will give you a higher value if prices are falling.
The ending inventory value on your balance sheet is one of the factors used by financial institutions before approving a loan to a business, so the technique that gives you the highest inventory value will be the best for your business.
2. Market Conditions
The cost of purchasing or producing inventory can change quickly based on various economic factors. Therefore, it is imperative to consider these different market conditions when determining a valuation method.
If, during the year, prices increase, the FIFO method will result in a higher value for ending inventory. But it’s not acceptable to change the valuation technique during the year. You’ll have to recalculate the value of your inventory, which may result in inaccurate counts and impact your balance sheet. Also, as mentioned earlier, you cannot make a change in the method without notifying the IRS.
Choosing the right inventory valuation strategy is critical to assessing inventory levels and facilitating tax reporting and financial analysis. FIFO and WAC methods are excellent ways for many retailers to determine inventory value and easily keep accurate records.
However, you must remember that inventory valuation is not enough for better inventory management. Investing in automated inventory management software gives you an accurate picture of your inventory and helps you make proper inventory management decisions.
KORONA POS, an inventory management software specifically designed for retail businesses, allows you to streamline your inventory with features that are perfectly customizable for your business. KORONA POS inventory tracking software automatically detects problems and allows you to prioritize products that are in negative stock or selling less.
Likewise, KORONA POS can adjust the appropriate permissions for certain users. You can have your staff perform counts without giving them full access to your inventory and values. If you want to learn more about KORONA POS, click on the button below for a demo with one of our product specialists.