Merchandise inventory refers to the merchandise obtained by a merchant for resell. Most merchandising companies sell products such as clothing, auto parts, and other tangible products.
A merchandising business model is mostly different in the way that the books are kept. If you run a merchandising business, you’ll show inventory as assets with procurement costs such as shipping offsetting or adding to your inventory cost.
One way that may be easier to think about it is to look at inventory in the cost of goods sold model. This comes in contrast to a manufacturing business that creates and sells products that they manufacture.
Merchandise Inventory: How To Be Effective
As you know or may have discovered, merchandise inventory almost always refers to retail-oriented businesses. While this is true, it’s not uncommon in our day and age for merchandise inventory companies to be built online. Because we’re a primarily warehouse oriented company, we’re going to focus on the ways that online merchandise inventory businesses can be more effective.
Maximize Profit with First-In, First-Out (FIFO)
When using the FIFO method, you’ll seek to sell the items that you’ve acquired first before items that have been acquired later. For a business that sells perishable goods, this model will help to ensure that they maintain high-quality shipments. This model is also effective if your business sells any seasonal products.
Additionally, when calculating the value of the remaining stock, you’ll base it off the cost of goods sold from the product that you acquired first. This stands even if the price of that same product rises or lowers when you’re re-ordering more inventory.
Last-In, First-Out (LIFO)
This method may seem contradictory to the first, but generally, the same mindset applies. You’ll seek to sell the inventory that you acquired last, first. In this way, you’ll adjust your accounting of the inventory asset you have to reflect the price of the inventory that you acquired first.
This model is one of the most complex systems and requires a good bit of manipulation on your income statement and inventory account. Most non-U.S. businesses won’t be able to use this model because of it being so difficult on the account end.
This system works great for companies that are based in the U.S. and sell non-perishable, raw materials such as gas, metal, or chemicals.
Just-in-time is used differently from the previous two methods in that inventory is purchased more as needed instead of keeping it in stock. When sales rise, so do new inventory orders to fulfill all the sales. This method reduces risk, overhead cost of storage, and waste from unused inventory.
One such company that has adopted this philosophy and seen it through to increase profits and decrease waste is Toyota. The company works to calculate sales based on how many vehicles have been sold and other market trends. In this way, even in the worst years or a drop in the economy, they can still be profitable. This system made them the most profitable and valuable vehicle manufacturer for many years.
You’ll find that this method works best for retailers who have mastered accurate forecasting, and who want to reduce holding costs.
The ABC analysis approach helps you prioritize the sale of different products based on the cost of goods sold. You’ll just need to place your merchandise inventory into three groups.
- A – High-value, low sales: this group is meant for the merchandise that makes your company good money but costs a significant amount to procure. You won’t want to keep these items in stock for too long because of the financial strain that it could put your income statement in.
- B – middle-value, average sales: Falling right in the middle is letter B. These goods are sold on a more predictable base but aren’t the most frequently sold.
- C – low-value, high sales: These merchandise items are the ones that you can’t keep on the shelf. They help to boost your balance sheet but also don’t provide a large source of income because of a lower selling point. You shouldn’t need to market these items too much or give them a lot of attention.
After you’ve established these groups, you’ll need to set your priorities. Make merchandise inventory group A the most important. What can you do to sell more of these items to help boost your financial statements and put your company in the black?
C products are the ones that will be self-sustaining. Keep an eye on them, so you have a good amount of stock, but don’t spend too much time worrying about them.
B products are products you’ll want to keep your eye on. Be wary of letting them move into the category of Obsolete Inventory. It’s best for your business if you can give them a push to sell more frequently or just to maintain consistent sales so that you can predict inventory changes.
Using Inventory Management Tools = More Profits
Another way that a warehouse merchandising inventory businesses can become more profitable is by using inventory management software. Some of the largest e-commerce companies have been able to build their business on the back of a great inventory management system.
All warehouses and e-commerce businesses could benefit from using an inventory management system. We have the perfect system for you that is specifically set up for your merchandise inventory needs. TopShelf by Scout is an innovative inventory solution.
The system easily integrates with other accounting, sales, and business tools that you’re already using. Contact us today for a quote based on the size of your business and the needs you might have. We also offer free demos that allow you to see the product in action. We can’t wait to hear from you!