LIFO Method: What is it, Characteristics, Advantages and Disadvantages

Sales or services are the engine of all existing businesses, whether small or large. All businesses prosper according to the success they have in the commercial field, so it is important that they follow a system that is very useful for them.

The LIFO method is used by many companies and businesses around the world, it allows them be able to sell or 'take out' the merchandise they have recently purchased, as its acronyms indicate, last in first out. It is used mainly in small companies that do not have a large amount of stored products.

How does the LIFO method work?

This method works contrary to FIFO, since the products that entered last are the first to be sold, that is, the most recent inventory will send the merchandise already existing in the business to the warehouse.

Small companies resort to this sales system since new merchandise will be sold at a different price than what was in stock, that is, it will gradually increase the capital of the business.

Why use the LIFO method?

The LIFO method is used because the old products lose their initial value, increasing it as new merchandise enters the inventory, offering many economic advantages to the owner of the business or company.

This method can only be used by companies or businesses that work with products that do not have an expiration date. expiration date, it is impossible to use this system with food products, personal hygiene, food or cleaning.

Advantages of the UEPS Method

• This method offers certain advantages to the merchant, it allows them to obtain a good profit since the products New ones usually arrive with a different selling price than what is currently in stock in inventory. By selling the products that come in, the company or business will not have much profit, so the taxes will be much lower.
• They change the price of the old products with the new sale price, making the goodsearn a little more value in the commercial realmTherefore, as inventory is renewed, the boss or owner of the business may have a capital bigger, without having to pay exaggerated amounts of taxes during times of economic inflation.
• With regard to times of economic inflation, companies that are governed by the LIFO method, they do not usually suffer so much devaluation or crisisfinancial, since they are leaving the merchandise that has cost more, remaining with the one that has a reasonable price. In addition, through this system the profit of the business is not increased, keeping taxes out of the ordinary.
• People who have small businesses of products such as decoration benefit, since your products are gaining more value according to demandTherefore, your merchandise will not be devalued if you have it stored or sell what comes first.

Disadvantages of the LIFO method

The right thing to do should be to sell the merchandise that you have the most in inventory, but the LIFO method works in the opposite way, causing certain products to be forgotten in the warehouse as they enter new. Many products can be damaged according to the environment where they are found, such as wood or iron.

This method is not convenient for government entities, since through this the companies lower their profits, making taxes few, which does not benefit the public entity at all, which needs taxes to subsist.

Data to take into account in the UEPS method

Being a method that does not work with an expiration date, other important points must be taken into account such as:

• Quantity: quantity of products that will enter the inventory, which will be the first to be sold.
• Price: the total price of the invoice and the unit price of each one will determine the final sale price. That price will be established for all existing products.
• Kind: the type of the product will determine the time in which it must be sold and will influence the final sale price according to the demand that it currently has.

What businesses should use the LIFO method?

• The main businesses that must use this system are those of industry or sale of building materials, since they handle large or heavy products, making it a bit difficult to handle and transport the materials as others arrive for sale. For example, sales of sand or stone cannot move all their merchandise, therefore, the newest is the first to come out.
• The vending machine ownerswork using the FIFO method, since the new merchandise that they entered is the first that will be sold due to the system used by the different tools that store processed foods.
• Another of the businesses that could work with the LIFO are thehardware stores, since they work with long-lasting materials that are difficult to damage over time. They usually have metal structures, rods and blocks that are difficult to move around. measure of new merchandise entry, which makes it easier for them to leave products behind old.

This system allows the company to keep a good order in the inventory and the quantity of existing merchandise, making the beneficiary be positively affected thanks to the increase in the price of old products or those that are not so demanded by the buyers.

The small companies can survive through this sales system, achieving good capital, without letting your merchandise devalue, generating excellent income through all the sales made, without letting all your money go into payments for the different invoices and the payment public.