What is FIFO?
FIFO stands for first in, first out. It is an easy-to-understand inventory valuation method that assumes that products purchased or produced first are sold first. In theory, this means the oldest inventory is sold to customers before newer inventory.
FIFO is designed for inventory accounting purposes and provides a simple formula to calculate the value of ending inventory. Though in many cases, what’s received first isn’t always necessarily sold or fulfilled first. Especially if you are a Retailer who practices FIFO, but the Wholesale products purchased were not managed via FIFO. However, if you sell items that have a short shelf-life, are perishable, or tend to go obsolete quickly - like CBD flower, CBD gummies and THC edibles - the FIFO method provides a dual advantage of proper inventory management and an easy method for calculating ending inventory value.
When you calculate inventory value that matches the natural flow of inventory throughout your supply chain, you’re able to track and regulate quality and offset the risk of high holding costs for storing inventory that is obsolete or no longer sellable due to expiration or best by date (also known as dead stock). Retail management in the cannabis industry has its own roller coaster, anticipating regulation or other changes to the market, so it’s logical to implement a simple and cost effective inventory management system such as FIFO to improve inventory accuracy.
Though it’s the easiest and most common valuation method, the downside of using the FIFO method is it can cause major discrepancies when COGS increases significantly. If product costs double but your sales forecasting uses historical values from months or years back, profits will appear to take a hit. It also does not offer any tax advantages unless prices are falling.
Step-by-Step On Running FIFO
How does it work? Inventory is assigned costs as items are prepared for sale. This may occur through the purchase of the inventory or production costs, the purchase of materials, and the utilization of labor. These assigned costs are based on the order in which the product was used, and for FIFO, it is based on what arrived first.
Imagine your CBD Store or Wellness Company purchased 100 bags of CBD gummies for $10 each, then later purchased 100 more bags of CBD gummies for $12 each. Then, the company sold 60 bags of CBD gummies. Under the FIFO method, the cost of goods sold for each of the 60 items is $10/unit because the first goods purchased are the first goods sold. Of the 140 remaining items in inventory, the value of 40 bags of CBD gummies is $10/unit and the value of 100 bags of CBD gummies is $12/unit. This is because inventory is assigned the most recent cost under the FIFO method.
With this remaining inventory of 140 bags of CBD gummies, let's say the company sells an additional 50. The cost of goods sold for 40 of these items is $10, and the entire first order of 100 units has been fully sold. The other 10 units that are sold have a cost of $12 each, and the remaining 90 units in inventory are valued at $12 each (the most recent price paid).
The FIFO method follows the logic that to avoid product loss or obsolescence, a company would sell the oldest inventory items first and maintain the newest items in inventory. A helpful tool to track inventory received is by either the expiration date, best by date, batch number, or lot number. When a Retailer is receiving inventory from a CBD Wholesaler, they should validate that the product received has a long enough shelf life to allow time for sell through.
To run a First-In-First-Out (FIFO) inventory management system, you can follow these steps:
- Keep accurate records of incoming and outgoing inventory items, including the date they were received, and either the batch number, lot number, best by date or expiration date.
- Prioritize selling items that expire first or were received first, before selling items that were received more recently. This ensures that older inventory is sold first, reducing the risk of spoilage or obsolescence. This can be done through dedicated inventory storage locations or processes such as moving old products to the front and re-stocking new products to the back, having a “first out” storage container, etc.
- If your store or facility has multiple locations of storage, it is even more important to implement a re-stock process, to ensure that you circulate the first in inventory to the first out location.
- Track inventory levels and monitor the flow of goods to ensure that you are consistently following FIFO methods. Use software or spreadsheet programs to automate the process and make it easier to manage and track inventory. During your end of month inventory, validate and document the batch number or expiration date, etc. to be ahead of any losses, and to ensure that FIFO is being followed throughout the month.
- Regularly review, audit and adjust your FIFO processes as needed to ensure that you are staying on track and maximizing the benefits of the FIFO method.
By following these steps, you can effectively run a FIFO inventory system and minimize the risk of your CBD, Delta-9 THC Edibles inventory loss or obsolescence and improve inventory accuracy. Build an internal process that works best for you and your team, as each business is different and has unique requirements, from Retail management to Manufacturing and Wholesale.
Partnering with Canvast through our retail partner program we will provide support to you for any of these processes. Canvast Supply Co. offers premium product at competitive pricing with ongoing store support. We offer functionally formulated wholesale CBD gummies, wholesale thc gummies, wholesale CBD lollipops, wholesale vapes, wholesale CBD flower, and wholesale CBD caviar.