One reason retail operation manager uses the retail inventory method of accounting is because it is quick and efficient to arrive at a current value of your inventory. However, it is neither accurate or sufficient. That’s why it’s important for retailers to perform a periodic physical inventory count. How often that count is performed is entirely up to each retail business, but it should be done two to four times a year is better. Retailers have to be able to respond to the changing business landscape, adapt and change, and pivot as often as possible is the new normal.

What is The Retail Inventory Method?

The retail inventory method is based on the cost of merchandise and how much you list your products for at retail. Accountants usually start with the cost of merchandise and divide it by the retail price to determine the cost-to-retail percentage. Next, you calculate the cost of goods available for sale. Then you calculate the cost of sales by multiplying the cost-to-retail percentage and sales amount for the period. Finally, you calculate the ending inventory by subtracting the cost of sales from the cost of goods available for sale.

Why the Retail Inventory Method is Not Always Accurate

While there are benefits to using this accounting method, there are few issues and challenges to reckon with. Here are three problems with the retail inventory method that retail operations managers should be aware of from the beginning:

1. It only works if you have a consistent markup across all products in your inventory. If you have products with wildly different markup percentages–and most retailers do–then your estimated ending inventory for the period could be off target drastically. The more diversity you have in your inventory markup, the more often you should perform physical inventory; which is time consuming as you know.

2. It’s based on historical assumptions that may not necessarily be true. If your markup is seasonal or different from what it was at the beginning of your inventory cycle, then the ending balance will be skewed. If you’ve recently changed your markup, you might perform a physical inventory to get started on the next cycle on the right track.

3. If an acquired retail operation is bought by a larger entity with huge amounts of inventory that bares a significant difference in markup percentage, it will skew the ending balance of the acquiring operation. This can be avoided by working through the process separately for each entity.

Is there a better way to avoid these blind spots and common pitfalls? You bet!

How to Scale-up with ChainDrive retail inventory management software

1. Identify the trend : If you want to sell the right product to the right customer, you have to identify ahead of time the shifting consumer behaviors before they happen, otherwise, you won’t be able to stock the right merchandise at the right time; so keep an eye on the fashion industry, current consumer trend in the market and shifting business models.

2.Effective planning and budgeting: Planning your retail budget is very important in retail industry. You have to operate your business within your budget span, but you must also meet the pent-up demand of your customers. After you decided which products to buy, you need to contact the vendors and place the orders accordingly. A centralized retail system that helps you do that more efficiently will benefit your retail store for a long time and your business resilience along the way.

3.Tracking the product: It begins at the time of ordering. Once you order a purchase for bulk merchandise, you need to find out where that product is in the supply-chain. And you need also to follow it all the way to your warehouse. Thereafter you need to track it from the warehouse to your stores, into the customer’s hands or his/her doorstep.

4.Allocation of Products: it’s important to allocate the right quantity of each product to each point of sale location. Retailers that sell well in one location may not necessarily sell at all in another geographic location or zone. Understanding retail business cycles, crowd thinking and changing buying patterns of customers at each retail store are essential precautions and barometers to keep on the watch list of driving factors.

5.Replenishment: you have to identify the right time to replenish your supply of each product, you carry and re-order at the right time. You need an inventory management software system that is agile-ready and that can help you customize your replenishment cycle to meet your demands.

Whether you are an apparel, footwear, jewelry, sporting goods, department store, home decor or specialty retailer, ChainDrive inventory software offers both the precision needed to benefit you as a retailer and the agility to address the peculiar nature of your specific vertical or niche market.

ChainDrive’s integrated accounting solution will definitely help you better manage your retail operations inventory and accounting functions while keeping your books immaculate and optimal for different operations.

If you still have more questions on how to ramp-up your inventory management system or want to see live how ChainDrive can help you step-up your heavy-duty retail operations, contact our retail management experts or log on to our site to book a free demo and consulting session.