Importance of inventory management in reducing costs and valuation approaches

The correct order and management of inventories is one of the main factors that affect the performance of companies and the profits obtained.

Therefore, it is vitally important for companies to have a well-managed and controlled inventory. The focus in this area should be to maintain an optimal level so as not to generate unnecessary costs.

Inventory management is composed of their control and planning, in general terms it is about understanding three important factors:

  1. How often should the inventory level be determined for each item?
  2. When should an order be placed with the supplier?
  3. What is the optimal order quantity?

How to value inventory?

A necessary element to keep a good inventory control is to know exactly what the value of our merchandise is. To do this, there are different approaches. Three of them are:

  1. FIFO (first in, first out)
  2. LIFO (last in, first out)
  3. The weighted average method: PAP.

Let’s see the case of the FIFO method

The FIFO method gets its name from the initials in English for first in- first out. In other words, what has entered our warehouse first must be what is first released.

It is one of the most used management methods when handling perishable products, for example. In this case, we seek to prevent the products from reaching their expiration date in our warehouse. In this way we reduce losses for this reason.

How is inventory valued with the FIFO method?

This assessment is something that we will usually need in order not only to optimize our logistics processes, but also to comply with accounting legislation. For this, it is necessary to have a series of data registered, such as:

  • Date of acquisition or sale of our products
  • Number of units sold or acquired
  • Acquisition price of each unit

With these data, we prepare a document that reflects each movement in or out of our warehouse. Notice that there are columns for the inputs and outputs, but for this you don’t need to worry as inventory management companies are here to help you in this.

Example of the FIFO method for the valuation of warehouses

Column: merchandise entries

Each entry of products will be reflected in a double column in which we record the quantity purchased and its purchase price. The product of both quantities will give us the value of that merchandise in our warehouse.

To know the total value of our warehouse, it is enough to add the resulting quantities of each new entry.

Column: merchandise outputs

Every time a product is shipped from our warehouse, we will deduct it from the oldest item. If necessary, we move on to the next one in time, in the event that there is not enough product to complete the output.

The value of our warehouse at that time will be the one that results from adding the amount that we have left of the remaining items to their corresponding price.

The important thing when making a valuation of our warehouse according to the FIFO method, will not be the sale price, but the price at which we buy the merchandise at the time, we suggest you to contact inventory management firms for this work.

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