Efficient inventory management is at the core of many businesses' profitability.
Ensuring accurate cost tracking, real-time reporting, and compliance with accounting standards can significantly impact a company's financial health.
One of the most effective methods to achieve this is the First In, First Out (FIFO) inventory costing method, especially when implemented with an ERP system like Microsoft Business Central.
Below we explore how Business Central optimises inventory costs through FIFO and why this approach offers significant advantages over alternative inventory valuation methods.
What Is FIFO & Why Is It Important In Inventory Management?
In basic terms, FIFO is the process of ensuring that the oldest inventory items are sold or used first. This approach is beneficial for companies dealing with perishable goods or products with time-sensitive value, such as technology hardware or pharmaceuticals.
By cycling older inventory out first, companies can avoid obsolescence, reduce waste, and maintain fresher stock.
When applying FIFO, the cost of goods sold (COGS) is based on the cost of the oldest inventory, while the remaining inventory is valued at the cost of the most recent purchases.
This method aligns closely with the actual flow of inventory in many businesses, providing more accurate financial reporting.
How Can Business Central Support FIFO?
Business Central streamlines the implementation of FIFO, automating the complex processes of inventory costing, stock management, and reporting. Here are the key ways it optimises FIFO for businesses:
- Automated Cost Tracking
With Business Central, businesses can configure FIFO as the default inventory costing method. Once set, the system automatically tracks the cost of inventory based on the FIFO principle. As stock is sold or used in production, the system ensures the costs of the oldest stock are applied first. This reduces the need for manual intervention, improves accuracy, and frees up time for other critical business tasks.
- Real-Time Inventory and Financial Insights
In a fast-paced business environment, having access to real-time data is valuable. Business Central provides comprehensive reports on inventory valuation and COGS, ensuring businesses can monitor their stock levels and costs in real-time. With accurate, up-to-the-minute data, business leaders can make more informed decisions on purchasing, pricing, and production, all while keeping a close eye on profitability.
- Seamless Integration Across Operations
One of the significant advantages of Business Central is its seamless integration across multiple business functions. As sales orders are processed, the system automatically adjusts inventory levels based on the FIFO method, ensuring that financial records, inventory management, and supply chain operations are fully aligned. This helps businesses avoid discrepancies between their stock levels and their financial statements, reducing the risk of costly errors.
- Multi-Warehouse Support
For businesses with multiple warehouses, tracking stock movement and ensuring FIFO compliance across several locations can be even more challenging. Business Central solves this by offering multi-location inventory management. It tracks which items were received first at each location and ensures the correct cost is applied as the inventory is used or sold. This allows businesses to manage their stock effectively across their entire operation.
- Compliance with Accounting Standards
FIFO is an accepted inventory costing method under most accounting standards, including GAAP and IFRS. Business Central ensures that businesses remain compliant by maintaining an accurate audit trail of inventory costs and movements. This makes it easier to generate financial reports, complete audits, and ensure that accounting practices meet regulatory requirements.
Transforming Inventory Management
Implementing FIFO through Business Central offers businesses a powerful tool to optimise inventory management and costs.
With automated cost tracking, real-time reporting, and seamless integration across operations, Business Central ensures that businesses can maintain accurate inventory valuations while maximising profitability.
Whether you operate in manufacturing, retail, or distribution, leveraging Business Central’s FIFO functionality can lead to more efficient, streamlined, and compliant inventory practices.
Start a conversation about inventory management with Business Central with our expert consultants:
