In a perpetual inventory system, you need to know how to calculate the cost of goods sold without the ending inventory numbers.
Category: Accounting
How To Run a Health Check on Your Inventory and Accounting Systems
In this article we’ll walk you through how to run a health check on your inventory and accounting systems, and how to use that information to correct any mistakes you find and avoid making them in the future.
Five Reasons Your Accountant Appreciates You Using an Inventory Management System
Authored by our partner, Accountfully
It’s no secret that accountants love details, especially when it comes to accounting for inventory. A good accounting team that specializes in inventory management will have a specific process to account for the cost of goods sold and support your cash flow planning. Knowing the cost of goods sold means better control of your margins as it relates to the product itself, to the additional costs associated with using multiple warehouses, and selling in each unique sales channel. Your accountant will also need to be able to sync the data across common apps like QuickBooks Online and various online sales platforms like Shopify, Amazon, and Faire.
So what is the best way to support your accountant’s requirements while also helping your organization to planahead and utilize finite COGS understanding as you scale?
Step one is implementing an inventory management system like Cin7 Core that tracks every cost. This gives business owners (and their accounting team) a clear view of the real cost of a product from component/ingredient to finished good. Cin7 Core shows quantities available and assists in planning orders to prevent stock outs. All of these are key areas that help you to stay on top of cash flow by planning for big purchases and predicting sales revenue. Let’s dive into the top five reasons your accountant appreciates your use of an inventory management system.
One: Supports The Delineation And Segmentation Of Complex Inventory Details
If you manufacture products that use multiple components to create the finished product – you will benefit from an inventory management system the most. Being able to outline the details of your inventory and understand the finite details that go into it will provide you with the ability to capitalize on margins and better understand various pieces involved in the management of your product sales. By knowing the details of each component of your product, you can assess where any cost savings can be applied and better understand when a restock is needed.
Two: Shows Inventory Assemblies
An inventory assembly lists all of the components that go into creating a finished product. For Example, a company that makes granola bars will need to define and track all of the ingredients required to produce a finished product granola bar. By tracking ingredients, this granola bar company can better plan out what components will need to be ordered, and in what quantities, to meet demand. Cin7 Core shows this pivotal data and allows you to have the visibility required to understand your inventory assemblies.
Three: Narrows Down And Shows The Details Of Your COGS
It is a good idea to be meticulous when it comes to inventory accounting because it gives you an accurate representation of what goes into your product’s success. You need to know your gross profit margin and the cost of goods sold. To accurately calculate these metrics you must be meticulous in your bookkeeping. The more manual inputs required to drill down into the details, the more chance for error or inaccuracies, not to mention the time spent on this effort. Using an inventory management system, like Cin7 Core reduces the likelihood of mistakes associated with manual input.
Four: Accounts for Landed Costs
The definition of “Landed cost” is the total cost of a product on its journey from the factory floor to your buyer’s door. It includes the cost to purchase or manufacture the product itself, shipment costs, insurance fees, customs, duties, and any other charges incurred along the way. Depending on how long and complex that journey is for your product, the higher the cost and the potential to affect margins. Having an accurate and detailed view of your landed cost as part of your overall COGS reporting is invaluable to understanding your true margins and if, perhaps, there is a way to lower these costs. The first step is to identify them, which is where Cin7 Core puts you ahead of the game.
Five: Shows You What Is On Hand, At Which Location
When overseeing inventory across multiple locations, it is important to understand the quantities of each product and where they are housed. If you don’t know how much exists, and where, it makes it harder to manage restocking and shipping. Cin7’s ability to show your controlling locations means better visibility over when it is time to restock and better shipping efficiencies when supporting orders that are closest to various warehouse locations. Plus, keeping tabs on your inventory quantities will support cash flow management, by being able to time restocks and plan for big cash outlays.
In Summary
Running an inventory-based company should not be a guessing game. You and more importantly, your accountant will appreciate the ability to dive in deeper to the details. The best way to do this efficiently is by implementing the right tools, like Cin7 early, which show the intricacies of your COGS and will sync with your accounting software. Using an inventory management system, matched with a skilled inventory accounting team will do the heavy lifting for you. Knowing these details will help you make cost-saving decisions confidently and stay current on opportunities for cost savings and business growth. Happy accountant, happy business!
What Is Cost of Goods Sold (COGS) + How to Calculate It
If you’ve been hanging around the accounting department, chances are you’ve heard the term cost of goods sold (COGS) thrown around a few times. But while COGS is important, it’s also a concept people tend to misunderstand.
Knowing what COGS is will help you better understand all of the costs associated with your product and your profit margins. In this article, we’ll go over this common accounting term, including what it is, and how to calculate yours.
Table of contents:
What is the cost of goods sold?
What is the cost of goods sold?
Cost of Goods Sold (COGS) refers to the cost of producing the goods that have been sold by a business. COGS is classified as an expense account on your income statement, representing the amount you have to recover from each sale to break even before bringing in profits.
COGS is only recognized upon the sale of inventory and is reported in the financial period in which those sales occur. For example, let’s say you have a clothing business with $5,000 worth of inventory. If you sell $2,500 worth of that inventory in the second quarter, you would record $2,500 in COGS. The rest would continue to stay in your inventory account.
As you can see in the example, the cost of inventory sold and COGS match. That’s because the value of your inventory stems from the direct costs of the items that make up that inventory, whether you’ve bought the materials to manufacture the items or purchased them for resale.
It also includes additional charges directly related to preparing products ready for sale, like packaging and delivery charges.
So, if we go back to the clothing store example, the $5,000 inventory number doesn’t come from thin air — the total includes the cost of the fabric, labor, packaging materials used, and delivery fees.
However, note that COGS excludes indirect expenses such as sales and marketing, so the costs associated with trying to sell t-shirts or jeans wouldn’t factor into the overall calculation.
Put simply, COGS equals the direct cost related to producing or purchasing products sold. Beyond that, just remember that the value of your inventory on hand is considered an asset until the inventory is sold.
Why is it important to calculate the cost of COGS?
Most businesses are in it to be profitable, and calculating your COGS is an important step to getting in the black. When you know your COGS, you can work to reduce the costs associated with selling, including the cost of your inventory.
COGS informs a business about the direct expenditures incurred in getting products ready for sale. For instance, if you know t-shirt fabric costs $5/yard, the labor to sew the shirts is $15/hour, and an average of $1 is spent on packaging each item, you can accurately price your t-shirts at a point where you can profit off the sale.
In this case, setting the t-shirts at $15 wouldn’t make you any money. Assuming each t-shirt uses two yards of fabric and takes 30 minutes to make, you need to price the t-shirts at $30 or more before you can even see a small profit.
Seriously, calculating COGS can make or break your business. Here are some of the other benefits of calculating COGS:
1. Helps create a pricing strategy
As demonstrated above, you can determine your selling price by knowing the direct costs incurred in producing or procuring products. Once you know these costs, you can figure out how to price your products to also cover your indirect expenses and earn a profit from the sale. But if you don’t know your COGS, you are honestly just guessing.
Overall, knowing COGS helps you determine how much profit margin you can keep on the products you sell.
2. Helps determine the total expenses incurred in selling products
Your profit and loss statement needs to list all your income and expenditures. By calculating the direct costs you have spent acquiring your stock, you can arrive at the total expenses incurred by including indirect expenses like your overhead, sales, and marketing costs.
You also need to know COGS before calculating your Inventory Turnover Ratio, which can help you make more informed decisions regarding your inventory and cut expenses further.
For example, if you calculate your inventory turnover ratio and find it’s pretty low, you’ll know you don’t need to replenish your inventory as often. That, in turn, means you can negotiate better deals with suppliers to further reduce costs.
3. Compare the market value of your product with your competitors
Determining profit margin by only considering direct costs incurred is an incomplete picture. If your prices are higher than your competitors you may make fewer sales.
If your prices are lower than your competitors, you can still incur a loss since your low profit margin might not cover your indirect expenses. COGS helps you to sell your product at a competitive price, grow sales, and, by extension, earn profits.
Now that you know the importance of calculating COGS, let’s learn the formula to calculate COGS.
How to calculate COGS
Here’s the formula to derive COGS:
COGS = Beginning Inventory + Purchases made during the period – Ending Inventory
To calculate the COGS for a reporting period, start with the value of the beginning inventory. If additional inventory was added during the reporting period, be sure to add the value of any new inventory produced or purchased to the value of the existing stock. Now, subtract the value of ending inventory from COGS sold for that reporting period.
Note, that this is a basic formula and does not take into account items like returns, discounts, obsolete stock, and the inventory valuation method used. It’s still really useful, however, as shown in our breakdown below.
Example of COGS
Let’s assume that company X uses the calendar year to record their inventory. The beginning inventory value was recorded on the 1st of January, and the ending inventory value was recorded on the 31st of December.
The beginning inventory value was $20,000. During the year, the retailer realized that the business would sell more than the inventory received earlier in the year, so additional inventory worth $7,000 was purchased. At the end of the calendar year, the ending inventory value was worth $4,000.
Now, let’s work out the COGS for the entire year by using the following formula:
COGS = Beginning Inventory + Purchases made during the period – Ending inventory
COGS = $20,000. + $7,000 – $4,000.
Therefore, COGS = $23,000.
The COGS equals $23,000, as calculated. Use this formula to help with production, purchasing, and pricing decisions.
Calculating COGS can also help you calculate your profit for a reporting period and help with decisions to ensure that indirect costs are covered.
Suppose your revenue is $75,000 in a reporting period. Knowing the COGS, you can determine your profit will be $75,000 – $23,000 = $52,000.
COGS – Key business takeaways
The COGS formula can be used at an individual product level to help with decision-making before producing, procuring, and selling that product. It can help you make decisions like how much inventory you need to purchase or whether you might need to focus on marketing a slow-selling product, and it’s useful when tax season rolls around, too.
The COGS for a reporting period is the total COGS for all product sales for that reporting period. It is a vital metric included in your financial statements and used to calculate your gross profit for that reporting period.
Gross profit is a profitability measure that shows how well a business can cover its indirect expenses and earn a profit. The value of COGS will always depend on the direct costs of the products sold and the inventory valuation method used by the business.
Frequently asked questions
What is the difference between COGS and expenses?
COGS is a measure of the expenses associated with selling your goods. In particular, the direct expenses like labor, manufacturing, and materials. It does not include indirect expenses like rent or general office materials.
Is the cost of goods sold the same as profit?
No. The name cost of goods sold gives you a hint that COGS covers some of your expenses. However, you can figure out your profit if you know your COGS. To do that, use the following formula:
Revenue – Cost of Goods Sold = Gross Profit.
Remember, COGS tells you how much your items cost to make and sell; profit is how much you keep after these expenses.
Is the cost of goods sold taxable income?
In general, the IRS allows businesses to deduct some COGS-related expenses. For example, the IRS states you can include some business expenses in your COGS, which you subtract from your revenue to arrive at your gross profit (your taxable income).
If you calculate this way, you are not allowed to deduct those expenses a second time as a business expense!
Closing remarks
COGS is a big part of running a profitable business, and your inventory is a big part of COGS. To keep track of it all, you should invest in a cloud-based inventory and order management system like Cin7.
When you add in an inventory management system, you have a much clearer view of how to address any slumps, slow-downs, or sales. Working with Cin7 can help your business hold onto less while making more. Request a demo today.
Understanding the Future of Automation and AI in Accounting
When CFOs were asked what one recommendation they had to improve company decision-making, the top response was “implement digital technologies, AI, and automation.”
And for good reason. Tools like automation and AI technology can create a positive ripple effect that extends to forecasting, planning, and analyzing your metrics.
Such perks encourage today’s finance professionals across all departments to develop a healthy appetite for technology-enabled decision-making, budgeting, and forecasting, which is especially applicable in accounting.
After all, avoiding technological changes in accounting is like insisting on navigating with an atlas and a compass when we all have dynamic maps in our pockets. Sure, getting where you want to go is possible, but you’re more likely to get lost and fall behind.
Let’s dive into how automation and AI in accounting are transforming financial planning and the role of finance and accounting within an organization.
How artificial intelligence is changing accounting
The journey from traditional accounting to intelligent budgeting
Concerns related to the adoption of AI in accounting
Navigating the future of AI in accounting
Final thoughts: Understanding the future of automation and AI in accounting
How artificial intelligence is changing accounting
Embracing automation and AI in accounting means businesses can process larger amounts of data more efficiently and more accurately. Letting technology handle repetitive and time-consuming accounting tasks, such as ledger entries, will give your team more time to focus on high-impact financial management work that requires human expertise, like identifying opportunities to improve cash flow or profitability.
The journey from traditional accounting to intelligent budgeting
To understand the impact automation and AI technology will have on the accounting industry, it’s helpful to take a stroll down memory lane to see how we got here in the first place.
Traditional budgeting
Traditional budgeting was often done annually and followed a top-down approach where financial targets were set based on previous performance and assumptions about future changes.
This approach requires repetitive data entry and manual calculations to track each transition and balance accounts. Accountants mainly used spreadsheets for forecasting and budgeting by adding their own formulas.
In many ways, it was like trying to reach a destination while wearing a blindfold. You know where you want to go, but without real-time financial data, you don’t know where you are now.
Even if you peek out the bottom of the blindfold for clues, you have to rely heavily on estimates and assumptions that you hope will point you in the right direction. Many times you remove the blindfold and are miles away from your goal. Ultimately, the journey is a repetitive process filled with endless trial and error.
Not to mention, traditional accounting also generates rigid results like forecasts and budgets that aren’t easy to update once you receive new information.
The arrival of digital commerce tools
Digital commerce tools started the transformation of budgeting and forecasting by providing access to more data and automated calculations. It was akin to removing the blindfold and getting an accurate map of your location.
Software with automation features can record transactions, balance accounts, and generate forecasts without as much manual input — and you can access all of that data in real time.
Real-time data increases the accuracy of budgets and means businesses don’t have to rely heavily on estimates. It’s become crucial for businesses, with 44.7% of companies reporting that improving forecast accuracy is a top financial performance strategy for 2023 and beyond.
Besides better forecasts, automating calculations and ledger entries decreases the risk of manual error and makes budgeting less time-consuming.
That way, businesses can update projections as new data becomes available.
Intelligent budgeting
Intelligent budgeting represents the future of bookkeeping, budgeting, and forecasting. Features like automation, AI technology, and machine learning will change how businesses do accounting by enabling real-time financial planning.
Real-time financial planning is a dynamic approach to budgeting that uses current data from internal and external sources when creating forecasts and budgets.
If we use the map analogy, this is your dynamic Google maps with live traffic estimates and a voice telling you where to turn and what to expect.
Dynamic forecasts and budgeting give you the opportunity to respond to and monitor for changes in the environment and adjust to less predictable situations, like seasonal demand.
And, just like Google Maps, the future of accounting is here, with 48% of accounting professionals expecting their organizations to invest in AI and automation by 2024.
Benefits of AI in accounting
The use of AI in accounting to facilitate real-time financial planning offers several benefits to businesses, including the following:
- Improved decision-making: Access to the more recent, accurate, and reliable data means you’re making business decisions based on more relevant, high-quality data.
- The ability to create a proactive strategy: Having access to up-to-date information and predictive analytics tools means you can capitalize on opportunities faster or address problems before they start to affect your results. It also makes you more financially resilient, which can help you weather an economic downturn without losing profit.
- Increased agility and adaptability: Decision-makers have the power to adapt their strategy based on real-time financial reporting.
- More time for strategic tasks: Automating repetitive tasks can help accounting teams and business leaders free up more time to work on high-impact initiatives and decision-making.
- Cost-effective scaling: Insights from automation and AI-powered financial analysis give businesses a more comprehensive view of their finances, which can help identify avenues for market expansion and opportunities to streamline your workflows and reduce costs at the same time.
- Expanding the role of accounting: With time-consuming routine tasks covered by technology, accountants can serve as strategic advisors to business leaders.
Concerns related to the adoption of AI in accounting
Despite the business benefits, the transformation from traditional accounting to intelligent budgeting can raise some concerns. For instance:
- Potential job displacement: With any AI-powered tool, there’s the concern that the software may make some job responsibilities or roles obsolete. However, the best results come from using AI and automation to support accounting capabilities instead of replacing human team members entirely.
- Data security and privacy: Automation and AI may require access to large amounts of data, making security and privacy a priority for companies to protect their and their customers’ information.
- Skills and learning: Accounting professionals will need to consider continual learning and upskilling to ensure they can capitalize on all of the opportunities and benefits presented by intelligent budgeting technology.
Navigating the future of AI in accounting
Potential concerns are no reason to stay behind the curve and avoid intelligent budgeting altogether.
Instead, business leaders should understand the concerns associated with intelligent budgeting and take steps to proactively ensure a responsible and effective transformation.
Here are a few things to keep in mind that can help you navigate the future of accounting more smoothly.
Give intelligent budgeting a supporting role
Just as Google Maps can’t drive you to your destination, AI and automation aren’t replacements for human team members.
Instead, intelligent budgeting can enhance the capabilities of your team, automate manual accounting processes, and enable informed decision-making.
Automate with human oversight
While accounting software with automation and AI can reduce human error, these tools aren’t a 100% guarantee against mistakes. As such, you still need a team to test the algorithms and methods to validate and verify the results.
Humans will still be responsible for explaining decisions made by AI tools, which means it’s crucial for them to have an understanding of how the software works.
For instance, you can use intelligent accounting software to generate financial statements, but have someone verify the accuracy of the information before it’s reported to stakeholders.
Prioritize ethics and human judgment
To integrate technology responsibly into your business, it’s important to remember that human judgment is a crucial element in the accounting profession.
Keep in mind that artificial intelligence was created by humans, after all, which means it’s possible for the software to introduce bias into financial processes. For example, bias can result in discrimination in lending decisions or fraudulent transaction alerts.
Final thoughts: Understanding the future of automation and AI in accounting
While holding on to tradition may be tempting, running your business with a map and a compass may not be the best way forward. Embracing tools like automation and AI have the power to get you where you want to go more efficiently.
By using technology to handle time-consuming, mundane tasks, accountants will be able to increase the accuracy of their insights and achieve more in less time. That gives them more time to focus on long-term growth and strategy.
Business leaders, too, will have quicker access to the most up-to-date information, which supports improved data-driven decision-making and the ability to respond proactively instead of react.
If you want to leverage the same technology benefits for inventory management, such as real-time product data, smart forecasting, and seamless accounting integrations, try Cin7 today.
Stop the stress: The future of budgeting and forecasting
A lot of hype happens when ‘budget season’ comes around for a business, with images of late nights and spreadsheets and stress levels boiling over. For accountants, it’s just another normal financial budgeting task with monthly updates including actual results and changes to the forecast.
How budgeting works
Businesses generally set a budget for the financial year ahead, based on prior performance and planned changes to the business, including product expansions, efficiencies, and changes in the market.The budget is used as a tool to track progress, usually on a monthly basis when the actual results for the month are compared to the budget set for that month. In this monthly review, the team creates an updated forecast for the remainder of the year to support upcoming business decisions.
For product sellers, this budget is done with varying levels of information, depending on what is easily accessible for the business. Setting a budget often means taking an educated guess on the volume, pricing, and cost of their product sales, rather than actual data that may be buried in systems or needs to be manually calculated.
Digital commerce tools simplify budgeting
With digital commerce systems, budgeting and forecasting is more sophisticated and accurate as historical information is readily available and easily analyzed. Budgets based on actual prior performance with an assumed margin of improvement give the most accurate picture of future success. Forecasts are then a simple formula of the actual year to date results plus the budget for the balance of the financial year.
Budgeting made easier with intelligent commerce
Looking forward, as software evolves and brings intelligent commerce to small businesses, annual budgets and latest forecasts must become a financial plan based on the latest real time factors, both internally and externally. The annual budget will take into account market predictions and the monthly forecasting process will take into account real time information for their market each month.
With the help of digital commerce, accountants can easily access the last 12 months of product sales to create their seasonal revenue and cost budgets. Intelligent commerce takes this a step further ,enabling businesses to have a financial plan that updates in real time based on the latest internal data and the targeted market conditions. Businesses that use the power of intelligent commerce can make strategic decisions to achieve the best outcomes or address adverse conditions as they happen.
Accountants and business leaders will be able to focus on making strategic decisions – including finding opportunities for expansion or cost savings, instead of spending time compiling historical numbers to work out a trend for the year ahead.
Cin7 and intelligent budgeting
Cin7’s solutions provide today’s businesses with tomorrow’s intelligent budget needs, including detailed product sales and costing information to create your budgets and update your forecasts. Plus, these budgets and forecasts can be compared to actual results within Cin7 for the greatest visibility with less manual data management.
Cin7 led the way with bringing digital commerce to product sellers and is committed to democratizing intelligent commerce for small businesses. Join us in this exciting journey where intelligent commerce will enable small business owners and their accountants to add more value to the growth of the business.
Pure Commerce share four secrets that helped their clients achieve record growth in tough market conditions
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DEAR isn’t just for sorting your inventory or modernizing your business: it helps you keep your approach flexible
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You can afford your own, fully-customized, fully-integrated ERP (if it’s DEAR)
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Any product business can benefit from DEAR
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A great implementation partner will let you outsource the back-office
“We actually started out as a DEAR customer,” says Filipe Nicolau, owner and founder of Pure Commerce. “We were responsible for changing the entire inventory management process for a clothing company and taking the business online — and DEAR was the go-to choice of ERP. We took that knowledge, and started a business around eCommerce inventory management systems and ERPs, and DEAR was a natural fit.”
Pure Commerce is a DEAR implementation partner and digital agency that specialize in solutions for eCommerce businesses. Filipe has been helping businesses both large and small implement DEAR for a long time now, and he’s happy to recommend the software to product businesses of all kinds.
“DEAR is a.) user friendly and b.) well plugged into eCommerce titans like Shopify,” Filipe says. “Compared to competitors, it’s a tenth of the price, and yet it does everything you need it to do.”
No matter how big your company gets, DEAR can scale to meet your needs.
Clients range from blue-chip companies in South Africa that are running giant warehouses and massive eCommerce stores, to mid-market businesses with five or six shops, all the way to people with just one or sometimes no store,” Filipe says. What they all have in common is they need a proper system to function like an ERP and manage inventory for their eCommerce sites.
“Because of DEAR’s price tiers, the smaller businesses can purchase it just as easily as the blue-chip companies. It’s accessible to all our customers. And no matter what we throw at DEAR, it just keeps being able to do it.”
Any product business can benefit from DEAR
The industry you’re in, says Pure Commerce, doesn’t matter too much: so long as your business is moving product, it can benefit from DEAR.
“We’ve got clients in the clothing sector, in manufacturing, in pottery, in health and wellness — all running DEAR.”
The first benefit of DEAR for many customers is simply being able to tell where all their inventory is. But once that’s established, customers find their other requirements or pain points are taken care of as well.
“When we first started, we used DEAR just to run a warehouse — purely ERP, stock management, goods in and goods out. Not even for financials, just to track stock. That was it,” Filipe says. “But with our business expertise and the functionality offered by DEAR, we can create any system a customer requires.”
Customers find DEAR helpful for syncing inventory through to finances, using programs like QuickBooks Online or Xero, and adding inventory capability to eCommerce platforms like Shopify. They use it for manufacturing, retail Point of Sale (POS) and expanding sales channels, making it easy to add a D2C channel to a B2B business, or vice versa.
“DEAR’s B2B portal is, for a lot of our customers, something they find themselves wanting to add, and it’s super easy to implement,” Filipe says.
Pure Commerce tends to stay away from the accounting and bookkeeping side of things. Their job is to make sure the business elements are all connected up, and they make sure their customers are connected with great accounting teams who know how to make inventory systems work well with financial systems of record.
Get an implementation partner that allows you to outsource the back-office
“A lot of our customers come to us saying they don’t know where to start. They’re starting a business from scratch. Well, we’ve done that ourselves! So we give them a full implementation, top to bottom, and in a lot of cases, it’s really saved their bacon. One client was a clothing company — we helped them get online, and they’re now running an online store and just launching their third physical store.”
For these companies, Pure Commerce functions essentially as an outsourced back office.
“We act as their support team for all things, not only eCommerce, but everything related to DEAR, to the operational side of the business. We’re their go-to.”
Pure Commerce have had great successes among their clients, with a number taken from operating entirely using pen-and-paper to DEAR Systems, using a full modern ERP and software app stack.
“We’ve had companies who were in the dark ages. Now they’re walking around with tablets managing production lines and things like that,” Filipe says.
Other success stories include a blue-chip company that started 2019 with barely any online presence and thousands of physical stores — and we all know what happened next. The Covid-19 pandemic hit, the company was forced to close all its stores.
“We had the CEO call and say ‘Listen, you need to save our bacon. We need to be fully online in a minimum of four months,’” Filipe says. “We launched them all online with one DEAR ERP and stock management system. There’s a massive warehouse in Cape Town, five stories high, that’s running all the company’s brands, all on DEAR. DEAR is keeping track of everything and feeding each brand’s website with inventory information.”
The changes Pure Commerce and DEAR have brought have had huge effects on the company. “It’s definitely changed their lives. They’ve never looked back — they’re pumping out products online and they’re growing day by day,” Filipe says.
DEAR offers incredible opportunities for new directions — for both product companies and their advisors
A lot of consulting companies would be thrilled to find themselves in the same position as Pure Commerce. They have a steady business and happy clients, and over the period of turmoil wrought by Covid-19 they’ve found themselves busier than ever. But they’re not stopping there. Their experience with DEAR means they can now branch out in exciting new directions, quite different to what you’d normally expect from a self-described “outsourced back-office.”
“Last year we used DEAR to launch our own Pure Commerce third-party logistics warehouse,” Filipe says. “A lot of clients don’t have warehousing, so we offer the ability to keep their stock in ours. We have our own DEAR account, which plugs into the client’s Shopify sites, and we pull the orders through to the warehouse. We pick, pack and ship on their behalf.”
All this activity is supporting the growth of Pure Commerce’s clients, as well as Pure Commerce itself. In the last three years, they’ve quadrupled their business. “And it’s primarily due to lockdown, to the pandemic. Everyone has realized that they need to be online,” Filipe says.
You can afford your own custom ERP — if it’s DEAR
Pure Commerce says that any product company can benefit from the features DEAR offers, but the features aren’t the only factor that decision-makers weigh up when considering an inventory management system. The price is also hugely important — but here, too, DEAR is beating the competition.
“The value for money you get from DEAR is amazing. You can get a B2B portal, you can run your POS, your sales channels, integrate into Amazon or pretty much anything else, integrate your accounting systems,” Filipe says.
“It’s a cost-effective system, a one-stop shop that gives customers an ERP and that allows Experts to solve pretty much all your customers’ problems with one system. The unique thing about DEAR is it can be for selling anything — from potatoes, to clothing, to pottery. That’s why it appeals to such a wide range of implementation partners and customers.”
About Pure Commerce
Pure Commerce is a DEAR implementation partner and digital agency that specialize in solutions for eCommerce businesses. Here, they explain how product companies can benefit from implementing DEAR — and the right implementation partner.
About Cin7 Experts
Cin7 Experts experienced with DEAR are an essential part of the Cin7 inventory management community. No matter what kind of product business you’re running, where you’re located, or what you’re trying to achieve, there’s a Cin7 Expert on DEAR who can help you achieve your ambition while saving your money and time.
FIFO vs. LIFO – Reporting compliant inventory valuations
In retail and wholesale sales, solid profits result from inventory that is closely managed. In this blog, we will discuss inventory valuation and accounting principles. We will cover why it is so important to value your inventory, different methods for inventory valuation, and how you should choose your inventory valuation method based on your business.
What is inventory, and how is it valued?
Generally speaking, inventory are goods that can be classified into 3 stages:
- Raw materials
- Items that are in production
- Goods that are ready for sale
Based on your business needs, internal accounting staff may need to assign value to inventory and classify it as a company asset since inventory can turn into cash in the near future. In order to accurately value your company, all your company’s assets may need to be assessed.
When to classify inventory as an asset
There are two methods of determining income and expenses for accounting purposes: cash accounting and accrual accounting.
According to the Internal Revenue Service (IRS) if your business is holding inventory, then you are required to use the accrual method of accounting.
In accrual accounting, a transaction is recorded when it is earned, which is triggered by generating an invoice or receiving a bill. This is why it is essential to track your inventory along every phase of the business cycle.
However, the 2017 US Tax Cuts and Jobs Act states that “if your business has gross receipts of less than $25M, you can treat your inventory as “non-incidental material and supplies.” In layman’s terms, this means that the items in your inventory need not be valued and considered as assets of the company as they are bought for resale. In this case, you can use the cash method of accounting.
Inventory valuation method
At the beginning and end of the fiscal year, inventory valuation is a must. For valuation purposes, you must:
- Apply Generally Accepted Accounting Principles (GAAP)
- Clearly reflect your income
- Maintain consistency from year to year
Since inventory moves among different stages in your organization, it’s challenging to track all the costs of individual items. GAAP provides businesses with helpful guidelines to properly evaluate their inventory.
Different methods of inventory valuation
A company can choose from various methods to determine its inventory costs suggested by GAAP. GAAP refers to a standard set of accounting principles that have been issued by the Financial Accounting Standards Board (FASB). GAAP suggests that businesses use one of two different inventory accounting methods – first-in-first-out (FIFO) or last-in-first-out (LIFO).
FIFO
FIFO stands for first-in-first-out. It is a method of inventory management and valuation in which goods produced or acquired first are sold, used, or disposed of first. In other words, goods are sold in the order they were received and subsequent shipments of the same item go to the back of the line.
For reporting purposes, FIFO assumes that assets with the oldest costs are included in the income statement’s cost of goods sold (COGS). So, if you sell a product, the cost of goods sold by using the FIFO method is the value of the oldest inventory. FIFO is one of the most popular in inventory valuation methods.
Using the FIFO method has some significant advantages:
- It is more realistic because most businesses ship older stock first to avoid depreciation of value or spoilage.
- FIFO increases the value of your purchased inventory and company net worth in times of inflation. As a result, you apply a higher asset value.
- Your operational reports are always accurate. As you are selling the oldest items first, your balance sheet will always show the actual cost price of the inventory.
LIFO
LIFO stands for last-in-first-out. It is a method of inventory management and valuation in which goods produced or acquired most recently are recorded as sold first. In other words, goods that were just received are accounted for ahead of stored backstock of the same item. The cost of the newest products is the first to be accounted for as the cost of goods sold (COGS), whereas the lower price of older goods are counted in inventory.
Some accountants in the US often advise using the LIFO method for your inventory accounting when you have stock with frequently changing costs. Using LIFO as a preferred method for such scenarios helps match the latest cost of inventory with the sales revenue of the current period. This can be a more straightforward approach for initial inventory valuation as well as for tax filing purposes.
Unlike FIFO, LIFO has some disadvantages:
- LIFO brings taxable income down when your cost price rises, but your profit will turn out significantly lower.
- If, in the near future, you plan to expand your business, not all countries allow a LIFO valuation.
- LIFO is not realistic for companies that sell perishable goods. Leaving the oldest inventory sitting idle could risk spoilage, leading to losses.
Example of FIFO
Let’s understand how FIFO is used to calculate Cost of Goods Sold (COGS).
| EVENT | FIFO |
| Buys an Item | $100 |
| Buys the same item after inflation | $150 |
| Sells an item for $175 | -$100 |
| Reported profit | $75 |
In the FIFO method, when calculating profit, its initial/oldest purchasing cost is subtracted from its selling price to calculate the reported profit.
Example of LIFO
The same example used earlier can be used to show the LIFO method for calculating the cost of goods sold (COGS).
| EVENT | LIFO |
| Buys an Item | $100 |
| Buys the same item after inflation | $150 |
| Sells an item for $175 | -$150 |
| Reported profit | $25 |
In the LIFO method, when calculating profit, the most recent purchasing cost is subtracted from its selling price to calculate the reported profit. As you can see, using the LIFO method for inventory valuation and accounting lowers your return profit.
Differences between FIFO and LIFO
FIFO or LIFO are the methods that companies use to assess their inventory and calculate profit. The amount of profit a company generates affects their income taxes.
The differences between FIFO and LIFO are shown below.
| Comparison parameter | FIFO | LIFO |
| Meaning | The first-in-first-out or the FIFO method assumes that the oldest products in a company’s inventory are sold first. | The last-in-first-out or the LIFO method assumes that the last item of inventory purchased is the first one sold. |
| No restrictions by GAAP or IFRS | IFRS forbids LIFO method | |
| Recording keeping | In the FIFO method, the number of journal entries decrease | In the LIFO method, the number of journal entries increases |
| Impact of inflation | Decreases the COGS and increases the net profit | Increases the COGS and decreases the net profit | Preference | Higher | Lower |
Which method is better?
We can say with certainty that the higher the cost of inventory, the lower the profit and the tax rate. The lower the cost of inventory, the higher the profit and the tax rate.
To know which method is best suited for your business, you need to look at the way your inventory costs are changing.
- If your inventory cost is increasing or is likely to increase in the near future, LIFO can be better. Because the cost of goods is higher, you will benefit from the lower taxes.
- If you feel that inventory cost could be decreasing in the near future, FIFO is the best option.
- If your preference is to accurately assess your inventory cost, FIFO is the better option. This is because FIFO operates on the assumption that the older and less costly items are usually sold first.
GAAP/IFRS regulations for FIFO and LIFO
Generally Accepted Accounting Principles, sets the standards for accounting procedures in the United States. Under GAAP, both FIFO and LIFO are allowed.
However, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Body (IASB) does not permit use of the LIFO method.
Outside of the US, most other countries follow the rules laid down by the International Accounting Standards Board (IASB). This is the reason why most US based companies use the LIFO method for local financial statements and switch to the FIFO method for their overseas operations.
If you ever decide that it would be ideal for your business to switch from the LIFO method to the FIFO method, you need to file a FORM 970 with the IRS. You are allowed to go back to LIFO only if the IRS gives specific permission.
Closing comments
In a nutshell, we have learned about inventory valuation and its importance in business to accurately determine the total value of all your assets and liabilities. While we have seen both FIFO and LIFO methods of inventory valuation, one thing is clear. No method is a foolproof solution for your business. Both methods have their pros and cons. As such, you should choose the method that best suits your business. If you are a firm that operates internationally, FIFO is the best method outside the US because the LIFO method doesn’t meet compliance requirements in most countries.
Cin7 was built with modern businesses in mind and only supports the FIFO method. Cin7’s inventory and order management software offers a cloud-based solution that integrates all your sales channels into a single platform. Cin7 provides advanced automation processes to create seamless transactions centered around a positive customer experience.
Ditch the spreadsheets and stop manual data entry. Reach new markets with Cin7’s inventory and order management system. Check out our product overview video here.
Top Five Key Lessons for Automating Your Inventory and Financials
Learn the top five ways product companies and ecommerce specialists can automate their inventory and financials with Catching Clouds: An Acuity Company.
The Top Five Key Lessons for Automating Your Inventory and Financials:
- Done right, automation actually makes good people even better
- To get financial fundamentals right, give them to someone else
- You need an expert who knows tech as well as accounting
- Look for an expert with a proven track record
- Every product seller needs to be on a cloud inventory solution
Not many people start a business because they dream of doing accounting.
But Acuity is an exception — and it exists because most business owners don’t just want to avoid accounting: they’re also pretty bad at it. Acuity, on the other hand, is really good.
Acuity is a specialist provider of outsourced cloud accounting services to eCommerce businesses in the United States. They work with businesses that are selling on Amazon, Ebay, Shopify, BigCommerce, Commerce House, Wayfair, Magento, and many more platforms.
In addition, Acuity has worked with QuickBooks Online and Xero for years. For a while, their eCommerce practice only worked with Xero, but it is now also adding QBO to the mix.
Scott Scharf is chief technology officer and eCommerce practice lead for Acuity. He co-founded his accounting practice Catching Clouds with his wife Patti Scharf, before merging with Acuity in 2021.
“The thing about what we do is, we’re really consistent,” says Scott. “We provide the daily, weekly, and monthly bookkeeping, accounting and controller-level work for eCommerce sellers.”
Automation and 3PLs are the way of the future — and they help your best people do more
Acuity says increasing the level of automation in your company isn’t about having fewer employees. It’s about giving yourself, and your employees, something better to do.
“When we automate accounting, we’re not doing it to remove the person — employee, spouse, whoever — was doing the bookkeeping,” Scott says. “The idea is that you’ve got a trusted person, so put them in a more trusted position.”
The same logic applies to product companies and 3PLs “Having a 3PL means your people can have higher-level tasks. You want those people who might otherwise be in your warehouse managing stock through a cloud inventory tool, negotiating purchasing, expanding your supply chain,” Scott adds. “They’re good employees. They care. You want them at a higher level.”
There will always be manual processes that need doing, and that software will struggle to automate, Scott says. What’s more, the supply chain crisis has changed the game. Where it might have once made sense to have your own warehouse, for many product sellers, it’s simply not worth it. Instead, smart sellers will automate what humans cannot do well, leaving them free to excel in other areas of the business.
“Don’t make smart humans do data entry. Let smart humans do smart human things, and make decisions based on data,” Scott says. “The more you leverage technology and people in the right places, at higher-level positions, the more profitable you’re going to be.”
Every product seller should implement cloud inventory solutions
The first app that Scott recommends for product sellers is, of course, online inventory management. Depending on the company’s ambitions and requirements, he recommends:
- Cin7 for multichannel sellers with complex requirements and high growth ambitions
- DEAR Systems for sellers who do their own manufacturing or Bill of Materials product assembly
- Cin7 Orderhive for pure eCommerce sellers
“I recommend that every product seller, of any size, implement cloud inventory solutions,” Scott says.
Connecting cloud inventory software to other best-of-breed software — like Shopify for eCommerce selling, ShipBob for third-party logistics, or ShipStation for shipping — lets you set and meet customer expectations in the same way a brand like Amazon does. It means a small brand can have the same capabilities as the biggest eCommerce companies in the world, with the added benefit of the personalized service that only smaller companies can truly provide.
“Amazon has set the expectation that customers can get their package in one to three days,” Scott says. “Now everyone can live up to that new standard.”
To get financial fundamentals right, give them to someone else
Getting the accounting right is vital to any product business’ success. Without good numbers, a business can’t know if it’s profitable. That’s where Scott and his team come in. Acuity makes it possible for smaller businesses to have the same accounting clout as a big player. The solution is simple: they take accounting right out of their clients hands.
“I’ve talked to a couple thousand sellers in the last 10 years, and none of them went into business to do accounting or bookkeeping, or to pay bills, sales tax, or income tax,” Scott says. “They’ve got a bigger ‘why.’ And that’s why financials are one of the first things they look at outsourcing.”
Once Acuity takes over the accounting, things get done properly by a team of experts who know how to navigate the byzantine pathways of international eCommerce selling and U.S. tax compliance requirements. To do this, their outsourced eCommerce offering has a team of specialist CPAs, along with a managed services team who can take care of the technical side.
“We’re able to support clients at all kinds of levels, but the main thing is always the same — we take over the financials, move them into the cloud, and we do it right. We update the chart of accounts, reconcile everything correctly, post income properly, post COGS properly per channel, and make sure everything flows together,” Scott says.
According to Scott, modern eCommerce accounting is as much about getting technology right as it is about compliance, reports, and projections.
“Having an accounting advisor that can translate, provide insight and accurate cash flow projections helps a business manage cash better and be more successful,” Scott says.
But without the right approach to tech, business leaders can find themselves lost in a confusing world of half-implemented, half-working apps.
“What some people do, when they don’t understand tech, is they just load an app and then another app and then another app. None of them connect, and all of a sudden they now have to enter data in three apps to accomplish something instead of putting it together,” Scott says.
This can put business owners right off implementing a modern software stack, but nothing could be worse. All they need to get it right is a good advisor.
“If you’re running an eCommerce business, you want an eCommerce accountant that already understands the space and has worked with dozens, if not hundreds of eCommerce companies. You have to go to the right people for the right tech advice — and then you want to leverage it, so you can expand and enhance and build automations so everything flows well,” Scott says.
About Catching Clouds: an Acuity Company
Acuity is an outsourced cloud accounting service provider, specializing in eCommerce. They offer accounting with Xero and QuickBooks Online, and support Cin7, DEAR Systems, and leading eCommerce, 3PL, and shipping solutions
About Cin7 Experts
Cin7 Experts experienced with DEAR are an essential part of the Cin7 inventory management community. No matter what kind of product business you’re running, where you’re located, or what you’re trying to achieve, there’s a Cin7 Expert on DEAR who can help you achieve your ambition while saving your money and time.
What Your Marketing Department Can Learn From Your Inventory Management System
A chain reaction of improvements
Since their Cin7 implementation, Brompton’s US business has gone from strength to strength. The first and most important ingredient in their transformation: their inventory management is now tip-top. Phil cites a laundry list of improvements, including the ability to ring-fence stock for certain channels, preventing mis-ships.
“Another work around we used to have, when we were using QuickBooks for inventory, was that we had to create different items for different channels, even if they were the same thing, because it didn’t have different channel pricing,” says Phil. “That was ridiculous. But Cin7 can easily do different channel pricing — we can do cost, retail, VIP pricing, all in the software. All these different tiers. That is a huge step up.”
“The product set-up is really good. I actually think it’s brilliant. It’s a lot more flexible, and we can include more detail and information in it that we couldn’t before, which gives us a lot more agility,” Phil says.
Integrations power the customer buy cycle
A big part of what makes Cin7 so powerful for Brompton is its 700+ integrations.
“The integrations, and Cin7’s depth of knowledge in that area, was a big part of it. It reassured us that we were making the right choice,” Phil says. “Other inventory management companies were more concerned about their own product, and not necessarily about what it connects with.”
Phil also notes that the Cin7 integrations and features they’re not already using give Brompton enormous scope to continue their growth without having to change inventory management solutions. “It gives us flexibility to grow as a business, knowing that we can add modules or apps on,” Phil says. “We can see that there is space to integrate with retail partners, to utilize Cin7’s B2B Online Stores, and to integrate with our 3PL. Those are performance enhancements that would be very difficult to match with another system, and it’s included in Cin7, which is a bonus.”
Cin7 benefits help the bike books balance
With Cin7 powering Brompton’s US operation across multiple channels, Brompton has a visibility and understanding of their operations that they never could have achieved before. And it’s not just the operations team that have benefited. Accounting, marketing, and leadership have all seen huge improvements. “We’ve got the whole US business in there,” says Phil. “We’ve got sales, operations, ecommerce, managers and others, all benefiting from Cin7.”
Brompton uses its internal accounting division to do the books for its US operation, which would normally be difficult and rife with errors. Thanks to Cin7’s QuickBooks Online integration, data flows smoothly, and inventory lines up neatly with the accounts. This powerful ability was what really helped sell Cin7 to Brompton’s accounting department.
“The accounting integration was a big part of what clinched it for Cin7,” Phil says. “Cin7 could slip in, almost unnoticed in a way, to the UK accountants and they could just keep doing their jobs — which made it easier for us to sell to that department!”
Marketing is also reaping the benefits, with the ability to effortlessly understand stock availability, and know exactly what goods can go on sale and when. Brompton’s Head of Marketing is able to look at Cin7 and know that there’s stock coming in before he launches a promotion on any one of Brompton’s channels. “In our previous systems, we never had that visibility. Now he can go ‘Ah, we’ve got 50 bikes that are available in the store, let’s get them out the door,’” Phil says.
Brompton’s leadership are also getting great mileage out of Cin7’s extensive reporting capabilities. “The president of our company is using it for reporting, and he’s noticing that the reporting is a lot stronger than we had before,” Phil says.