One of the most common mistakes that small business accounting solutions often make is maintaining too much inventory. This is a problem since it’s not easy to convert it into cash.

Furthermore, certain inventory items have expiry dates and they might perish before reaching the consumers.

This is why it’s important that you pay special attention to inventory management especially if you’re running a small business.

When it comes to inventory management, there are two methods that companies opt for: FIFO and LIFO. Let’s take a look at which one is better:

FIFO

First In First Out method of inventory management assumes that the item that is put on the shelf first will also be the one that is sold first. Companies, which manufacture perishable products usually, go for this method.

It’s no secret that we live in times of economic uncertainty. FIFO is ideal for use in these situations since the cost of goods sold remains low when there’s an increase in inventory prices.

Since you’ll be getting rid of the items you produced initially therefore, your bottom line will look better. This will produce a better image of your company to bankers and investors. It will also be more profitable for the company but you’ll also have to pay higher taxes.

An advantage of FIFO is that the company does not have to adhere to GAAP or IFRS restrictions.

LIFO

Last In First Out, or LIFO, is different from FIFO since it assumes that the last items put on shelf will be the ones that are sold first. The last units on the shelf are priced at a higher rate and the company makes more money when they are sold.

However, overall your net income is comparatively lower since you still have older units in the inventory. The benefit though is that you’ll be required to pay lower tax.

This is main reason why companies opt for this method when the corporate tax rates are comparatively higher.

Another problem with LIFO is that it consists of multiple layers of inventory and you need to keep track of each individual layer. This can be quite challenging at times.

Furthermore, when you’re using LIFO, a decline in prices will affect your balance sheet. It wouldn’t give an accurate assessment of your financial position and will affect your cost of goods sold.

Need help with inventory management and accounting? Get in touch with us. We offer accounting and professional accounting services in Florida.

In addition to that, we also offer accounting for small business. Contact us now at 1(954) 596-9966 or visit our website for further information.