How much retail inventory do I have left this period? What is its total value? If counting by hand, performing a physical inventory count of your merchandise can be time-consuming and even expensive, as it could mean shutting down the store to get an accurate count.
Adopting the retail inventory method can help owners get a more regular sense of what’s available. By accurately setting up inventory and accounting logistics, business owners can better manage operations and continue to grow.
There are, of course, advantages and disadvantages to adopting this approach. But first, let’s get a few things clear.
All the automated sales tracking in the world isn’t a substitute for actually seeing what you have on the shelves. For some, taking inventory would mean closing the store to get an accurate count. But it also means paying staff for time when no sales are being generated.
The retail inventory method offers more of an approximation.
Here’s how it works:
The result is the total value of the inventory on hand at the time.
Here’s an example: Kenyatta’s B Corp sells home coffee roasters for $250 retail, which cost $150. Cost-to-retail percentage is 60%. Kenyatta’s beginning inventory cost $1,100,000 and paid an additional $1,900,000 for purchases. They experienced sales of $2,500,000. The calculation of its ending inventory is:
|Beginning inventory||$1,100,000 (at cost)|
|Purchases||+ $1,900,000 (at cost)|
|Goods available for sale||= $3,000,000|
|Sales||– $1,750,000 (Sales of $2,500,000 x 60%)|
Using the retail inventory method saves retail operators and merchants the time and expense of shutting down for a period of time to conduct a physical inventory.
It’s part of the Generally Accepted Accounting Principles provided by the American Institute of CPAs. And this method creates a report on the value of the inventory on hand, a useful document when it comes to determining the value of a business.
While the upside of adopting the retail inventory method for your business are real and substantial, there are some potential drawbacks Commerce retailers and merchants should be aware of.
These aren’t reasons to not use the retail inventory method, but are points that should be considered prior to implementation.
The retail inventory method is not a system that will work best for everyone. Those will find the most value in it tend to be:
Even if the retail inventory method is found to be a good fit for your business, a physical inventory that stops the clock and actually counts the goods on hand is still recommended as it provides a more clear picture of sales and value.
Remember: The retail inventory method is closer to being an educated guess than a concrete calculation of how much value is currently held in the form of product. It provides numbers that are directionally accurate and so can help give snapshots at any given time, even if those pictures aren’t as clear or detailed as physical inventory.
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