What is the FIFO Method and what is it for?

In the commercial field, the famous FIFO methodThis is a kind of system that facilitates the exit of all the merchandise that has entered the business in an updated way, allowing better control of the inventory. Abbreviations FIFO they mean "first in, first out."

Many companies use this method to be able to take out all the merchandise they have for sale, and thus not accumulate unsold merchandise. From small to large companies, they use FIFO, which allows constant inventory renewal and it offers many advantages in the economic and accounting fields.

How does the FIFO method work?

FIFO is an easy-to-use method, with it the oldest merchandise of the companies will go out and be sold, so that these are not lost or forgotten in the warehouse, allowing the company greater profit and order in the Inventory.

East allows to have a chronological order of all merchandise, with their respective unit prices, date of entry and total cost of the merchandise, all with the purpose that the oldest products in stock take them out and be sold.

The FIFO is ideal for companies that work with food products, whether fresh or processed, as it allows products not to be damaged or lost before being sold, constantly helping the company to renew

Why use the FIFO method?

The companies using the FIFO systemyou will notice that the net earningsor the total earnings are much higherConsequently, the capital of the business will increase with the passage of sales and inventory renewal. It allows accountants, administrators and merchandise managers to keep an order in terms of what exists, knowing which ones should go out first and which ones sell faster.

Advantages of the FIFO Method

There are many advantages that a business or company has when working with this method, this has been one of the most used and recommended among all traders, especially if they work with food perishable.

• The company will have a constant movement around its products, without leaving them in storage, since they will all go on sale.
• The final income is much higher since the price of the merchandise will be updated according to the current purchasing costs, therefore older products may be priced the same as older products. current.
• In the accounting books, the last purchase price of the merchandise is recorded, therefore, the initial purchase product does not interfere with the accounting record or the money inflows.
• With the order in the inventory, you will have greater knowledge regarding the products still in existence, the sales made and the current cost.
• If there is a return from a customer, the product re-enters the system with the current purchase amount, not with the one it had in the first instance.
• This method allows attendees to have more knowledge about the transactions carried out, correctly evaluate the products and carry out the correct purchase and sale process.
• With the FIFO the merchandise will not suffer a devaluation.

If there is constant inflation in the economy, this method will save many of the merchants, since it will allow them not to suffer losses in terms of products, and they can buy merchandise again without the need to look for extra money, that is, prices will be updated as the product increases. old.

Disadvantage of the FIFO Method

The only disadvantage of this system is the tax increaseSince, the higher the capital income from the sale of merchandise, the higher the amount to be paid in government entities. If the company has a lot of movement, billing and price increases in products, taxes will immediately go up thanks to profits.

It is possible that, at a time of inflation, products could rise in price exaggeratedly, causing some discomfort to the public. In those cases, you must know how to handle the situation correctly so as not to lose customers through product increases.

Data to take into account in the FIFO method

When the company uses FIFO, it must have its correct record of merchandise data and purchases and sales in the accounting books. The most important data to have a good business process are:

• Date: the date of entry of the product to the business or company. In the case of food, the expiration date of each product will be noted to know what the maximum sale time is.
• Quantity - The quantity of merchandise that has just entered inventory.
• Detail: know what type of product it is and how it should be sold.
• Cost: both the total cost and the cost of each product must be known to obtain the final unit price.

What businesses should use FIFO?

It is recommended that businesses that sell clothing, beauty items, food, medicine and premium items need to manage their sales through FIFO, since they are products that can expire quickly or deteriorate when stored.

With regard to clothing sales, with each season that comes out, it is a new collection that hits stores, for which it is essential to sell those that do not have much current demand and that could go from fashion.

Perishable foods such as fruits, dairy, charcuterie and meats should be sold by the FIFO method, to go out of those closest to their expiration date.

If a company wants to maximize its profits, the FIFO allows you to obtain a higher income and greater movement in all your merchandise, to gradually update the business and be able to invest more capital in terms of products, so that so traders can meet all their expectations without reaching a point of clutter and lack of commodity. This allows them to run a good business or company, having a good buying and selling process.