What You Need To Know About Inventory Valuation & Strategies Every Retailer Must Understand

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One of the most difficult aspects of being a retailer is inventory management. It is, however, one of the most crucial aspect. It’s impossible to understand your company’s financial situation unless you have a good understanding of how much your inventory is worth.

Retailers can build an accurate picture of how much their inventory costs them over time by performing regular inventory valuations — and how the value of this asset affects their tax obligations and profitability.

In this post, we will define inventory valuation and the various inventory valuation methods that retailers can use for inventory accounting.

In this post, we will define inventory valuation and the various inventory valuation methods that retailers can use for inventory accounting.

What is inventory valuation?

The majority of merchants will have a significant amount of capital invested in their inventory (particularly if they use a Just in Case [JIC] inventory management approach), so knowing the worth of your present assets and how they affect your profitability is critical.

Inventory valuation is an important aspect of inventory accounting that allows you to determine the worth of unsold inventory. Understanding inventory value is crucial when generating end-of-year financial accounts for cash flow and tax purposes, among other things.

In conclusion, inventory valuation is used to determine your total gross profits, which are influenced by your total cost of goods sold (COGS). This will either inflate or deflate your profits, depending on how your inventory is priced and the cost flow assumption you apply.

To properly value your inventory, you must account for all costs associated with acquiring and preparing goods for sale, as well as the purchase price (excluding indirect costs such as marketing or administration). This includes the following:

  • Labor
  • Raw Materials
  • Handling
  • Transportation
  • Tax/duties
  • Warehouse Utilities

Understanding the value of your inventory goods will help you make future purchasing decisions and establish whether your present inventory management strategy is effective. To help control changes in the market rate of your inventory, there are a variety of inventory valuation methods available, albeit the most appropriate strategy will depend on the type of your organization

What is the significance of inventory valuation in the retail industry?

COGS is a term that refers to the cost of goods sold. Depending on which inventory valuation technique your retail business employs, COGS will vary. 

The less you can assign to the cost of goods sold, the higher the closing inventory valuation. This is why it’s critical to ensure that you’re appropriately pricing your inventory, otherwise your entire profitability will suffer.

Making the best markdowns/restocking decisions. You need to know how much your inventory costs you in order to price your products appropriately and make a decent profit margin. This has an impact on markdown decisions, especially if you have surplus inventory that needs to be sold before depreciation sets in. You may calculate your business’s minimum profit margin by using the correct inventory valuation method.

What are the various methods for valuing inventory and how do they work?

It’s crucial to understand the difference between using an inventory valuation method for accounting and using it as an inventory system. For example, in order to employ FIFO for inventory valuation, a company does not have to sell things on a first-in, first-out basis.

Which technique of inventory valuation is appropriate for your retail store?

Choosing the best inventory valuation method for your retail firm is dependent on a number of criteria, including:

  • What is your product?
  • Are you trying to attract investors?
  • Are you planning to apply for Business Loans?
  • How much does your stock’s price fluctuate?

Key Takeaways

Inventory is one of the most important parts of the jigsaw when it comes to running a business, and it’s crucial that you adopt the correct valuation plan to help your company expand and profit. You may acquire a strong handle on your business’s profitability and be better by employing one of the four inventory valuation methods discussed above. When it comes to making important decisions about your brand’s future, you should be well-informed.

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