What is the retail inventory method


Mon Feb 07 2022

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The retail inventory method could be particularly beneficial for small business owners in the boutique niche.

Inventory is the core of every small clothing shop, which is why you're likely to have a large portion of your cash invested in it. It only makes sense to keep an eye on the worth of your inventory so you can make the best decisions possible about what to purchase, what to invest in, and when to add new goods to your inventory.

While there are a variety of methods for determining and tracking the worth of your product, the retail inventory method is one of the most often utilized. We'll go over the basics of the retail inventory approach and how you may apply it to your small clothes business in this article.

The Retail Inventory Method: What It Is and How to Apply It to Your Business
The retail inventory method is a popular method for managing the inventory of a business. In the context of small clothing or fashion businesses, this method can be particularly useful for reducing losses and keeping products in order.

So what is inventory, exactly? Inventory is the accounting of products, items, components, and raw materials that a small business uses to gain a profit. A business owner would perform inventory management to ensure that one has enough merchandise on hand and to recognize when there is a shortfall. With this in mind, let’s break down the retail inventory method.

What is the Retail Inventory Method?

The Retail Inventory Method is a method of calculating the worth of a store's inventory over time. Essentially, it is a method of accounting that allows you to swiftly estimate the worth of your ending inventory over a certain period of time. This works by deducting the entire amount of sales from the total retail value of all the goods in your inventory, then multiplying that amount by the cost-to-retail ratio.

If you want to understand how to manage inventory with this method, you must start with finding your beginning inventory.

How to Find Beginning Inventory

Before you can use the retail inventory method, you’ll need to calculate your beginning inventory. The quantity of a product in stock at the start of an accounting period, such as a month or a year, is known as beginning inventory. Because each accounting period is linked to the one before it, the beginning inventory of one period will be the same as the ending inventory of the one before it.

To find your beginning inventory, use this formula:  

(Cost of goods sold + ending inventory balance) - cost of purchases = Beginning Inventory

Let’s consider an example. You solid 300 sweaters during a specific accounting period. Each sweater was purchased wholesale for $15. Your cost of goods sold would be $4,500. Your cost of purchases during the accounting period could be somewhere around $800. Your ending inventory balance for the accounting period could be around $300. Thus, your beginning inventory would be ($4,500 + $300) - $800 = $4,000.

How to Calculate Ending Inventory

To find your ending inventory and the total cost of your retail inventory, follow these steps:

  1. Calculate your cost-to-retail ratio by multiplying your total cost by the retail price.  (Cost / retail price x 100 = Cost-to-retail ratio)

  2. Calculate the cost of the products for sale. You may achieve this by adding the cost of your initial inventory to the cost of your purchases. (Beginning inventory cost + cost of purchases = Cost of goods available to sell)

  3. Calculate your cost of sales by adding up all of your sales and multiplying it by your cost-to-retail ratio.  (Sales x cost-to-retail percentage = Cost of sales)

  4. Subtract the cost of sales from the cost of products offered for sale to get your ending inventory.  (Cost of goods available for sale - cost of sales = Ending inventory)

To summarize, you’ll need to know your cost of goods to sell, product sales, and cost-to-retail ratio in order to calculate your beginning and ending inventory. The retail inventory method is popular for a reason-- it’s used by small clothing business retailers around the world for the purpose of keeping track of one’s stock quickly. This method is particularly useful for small businesses that have several locations. However, if you do not have a very consistent cost-to-retail ratio, the retail inventory method may not be very useful for your specific use case. Still, the retail inventory method is worth trying out. You might be surprised by how effective it can be for inventory management.

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